When Stock Bears Capitulate

Printable Version 

Dear fellow investors, 

We love the stock market, but there is one job in the industry we would never want to have. Most investment and mutual fund companies have a stock market strategist. This is the person who gathers statistics on the stock market, reviews the charts, tracks sentiment indicators, and attempts to guide investors on what might do well over the next six to twelve months.

What brought this to mind was the news that one of the most respected strategists, Mike Wilson of Morgan Stanley, admitted defeat as the staunchest bear on Wall Street. In his words, “we were wrong” and softened his stance.

Let me explain why we don’t make shorter-term market predictions. First, we don’t think we know any better than anyone else what the stock market will do over the next year! Second, we understand that these firms try to keep their investors updated in a way that keeps them in their chairs. Third, these strategists do put out fabulous charts and information that is useful to long-term investors like us. We love their information and don’t envy their position in the marketplace.

As contrarians, we view bullish strategists who give up at bottoms and bearish ones that give up the bear claws at tops are a necessary part of the natural stock market cycles. When strategists are uniformly bullish like now, we naturally are in less of a hurry to buy bargains because those bargains are hard to find. In 2009, the bearishness was so thick that it was hard to find a bullish strategist. We use a three-to-five-year time frame as we apply our eight criteria for stock selection and are surprised when we get rewarded quickly.

We stay pretty fully invested all the time because we believe investors come to us for strong large value representation in the asset allocation they choose. However, from a longer-term perspective, we agree with Mike Wilson’s view that returns will be retarded by higher interest rates, stubborn inflation and elevated prices left from the financial euphoria triggered by the free money of the last ten years.

We believe that real assets and commodities will outperform in the stubborn inflation period we foresee and expect our returns could be better on a relative basis than the last ten years. However, these returns should be significantly lower on a nominal basis than the history of our strategy.

Lastly, don’t be too tough on Mike Wilson. He may well be very right about the stock market over the next three years. If and when that happens, we could do quite well in a stock-picking environment.

Fear stock market failure,

william smead.

William Smead

The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

©2023 Smead Capital Management, Inc. All rights reserved.

This Missive and others are available at www.smeadcap.com

We Advise Investors

Sign up to get our advice sent straight to your inbox.

Recent Missives

1Q24 U.S. Value Strategy Newsletter: Common Stock Psychology Matters

April 15, 2024

There are four main educational disciplines that are important to us in the investment process. We believe investors need to understand economics, the history of the stock market, the mathematics of investing and...

⟶ Keep Reading

1Q24 International Value Strategy Newsletter: Higher Natural Rates

April 15, 2024

As we finish the first quarter of 2024 and look ahead, global stock investors are looking for lower short-term rates from central banks. The question remains whether they will get them. Looking back...

⟶ Keep Reading

Bloomberg Markets: Bill Smead on Bank Stocks and Inflation

April 13, 2024

Bloomberg Markets 4/12/2024 For more information go to www.bloomberg.com. The information contained in this article represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past […]

⟶ Keep Reading

Hit Them Where They Ain’t

April 2, 2024

[...] As value investors, we go into companies that are out of favor but have characteristics that could lead us to multi-year winners. Our best stocks were found in the holes in the...

⟶ Keep Reading

Saved by Zero

March 19, 2024

[...] The U.S. Federal Government has set a net zero carbon goal by 2050. Tremendous resources have been applied with borrowed money to fund these goals and subsidize money-losing green investments. After pouring...

⟶ Keep Reading

Looking for the Outsiders

March 12, 2024

William Thorndike’s book "The Outsiders" has been considered a classic for some time now. His story teaches readers about the business performance of Henry Singleton, Katherine Graham, John Malone and Daniel Burke. These...

⟶ Keep Reading

We Advise Investors

Sign up to get our advice sent straight to your inbox.

US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

NON-US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

Scroll to Top