Value Investor Bill Smead Remains Cautious Despite Market Pullback
OMAHA, Neb. — Veteran value investor Bill smead, founder of Smead Capital Management, is holding back from his usual bargain-hunting strategy, signaling continued market unease despite recent corrections. Smead, who began his career in 1980, suggests the market still has further to fall before it reaches attractive valuation levels.
“The psychology of both the market and the economy are very bearish, and that would normally be a reason for us to be very positive,” Smead told Archyde.com. “the problem is we have to unwind the largest mania of my career.”
Smead’s caution comes even after the market has undergone a significant pullback.He points to two key metrics indicating that the market remains overvalued: elevated household equity holdings as a percentage of household balance sheets and the so-called “Warren Buffett indicator,” which measures total stock-market capitalization relative to GDP.
According to the Federal Reserve, household equity holdings remained historically high at the end of 2024. The “Warren buffett indicator,” a favorite of market analysts, also paints a similar picture of potential overvaluation. Smead noted that this ratio “would have to fall 50%” to reach a market cap-to-GDP ratio of 80%—a valuation level Buffett identified as a buying possibility in September 2009. He added that while a short-term reversion to that level is unlikely, this unwinding “will be a multiple-year phenomenon.”
This cautious stance differs from Smead’s typical approach during market downturns. His fund, Smead Value Fund (SMVLX), has a reported history of strong performance, notably outperforming 96% of similar funds over the past 15 years, according to Morningstar data.
But smead, last year, warned of an impending reckoning for the market. More recently, his investment strategy has focused on sectors poised to benefit from an economic downturn, specifically energy stocks, mall reits, and homebuilders. He has publicly prepared for a shift away from high-growth tech stocks, a move that negatively affected his fund’s performance in 2024, with a gain of just 3.5%. In October 2024, Smead observed that the energy sector was trading at cheap valuations due to trade war-related production increases and heightened fears of recession. He remains optimistic that these stocks will perform well, saying: “In the deep recession of ’08, Americans used 2% less gas than the year before.”
Bearish Sentiment and Stagflation Fears
Recent data suggests a growing sense of unease among investors. The American Association of Individual Investors (AAII) survey has indicated a prolonged period of bearish sentiment,with more than half of its members expressing pessimism for a record eight consecutive weeks.
Adding to the concerns is the potential for stagflation – a combination of slow economic growth and high inflation. Bank of America’s Global Fund Manager Survey reflected these worries, revealing that a significant proportion of fund managers planned to reduce their exposure to equities. Several economists now believe that the Federal Reserve may begin cutting interest rates later in 2025 in an attempt to stimulate the struggling economy.
Counterargument: Is the Market Overreacting?
While Smead’s analysis paints a cautious picture, others argue that the market may be overreacting to near-term concerns. Some analysts point to the underlying strength of the U.S. economy, fueled by robust consumer spending and a strong labor market. They also contend that corporate earnings remain resilient, despite inflationary pressures. Additionally, the decline in long-term U.S. Treasury yields is seen by some as a possible indicator that the U.S. economy is already on a more positive glide path.
Furthermore,some observers believe that the current pullback presents a buying opportunity for long-term investors. These analysts argue that valuations in certain sectors have become attractive, offering the potential for significant gains as the economic outlook improves.
FAQ: Navigating Market Uncertainty
Q: What is the “Warren Buffett indicator,” and what does it tell us?
A: The “Warren Buffett indicator” is the ratio of total stock-market capitalization to GDP. It is used as a gauge of whether the stock market is overvalued or undervalued relative to the overall economy. A high ratio suggests overvaluation, while a low ratio suggests undervaluation.
Q: What is stagflation, and why are investors worried about it?
A: Stagflation is a combination of slow economic growth and high inflation. It poses a challenge for policymakers, as traditional measures to combat inflation, such as raising interest rates, can further dampen economic growth.
Q: What sectors is Bill Smead currently favoring?
A: Smead has been loading up on energy stocks, mall REITs, and homebuilders, anticipating that these sectors will perform well during an economic downturn.
Q: What should individual investors do in the face of market volatility?
A: It is indeed crucial to maintain a long-term perspective and avoid making impulsive decisions based on short-term market fluctuations. Consider diversifying investments across various asset classes and sectors to mitigate risk. Additionally, consulting with a financial advisor can definitely help develop a personalized investment strategy tailored to individual financial goals and risk tolerance.
Q: How long coudl the current market “unwinding” period last?
A: According to Smead, the the current market “unwinding” period, where elevated stock valuations gradually decline, “will be a multiple-year phenomenon.”
