Bear Markets Like This One

by William Smead, Smead Capital Management

Dear fellow investors,

We are getting questioned constantly on how long this bear market in U.S. stocks will continue. It’s a reasonable question, and as we always do, we look back at the most similar situations and view the depth and length of the most analogous bear markets of the last 60 years.

Key ingredients of this current and analogous bear markets:

1. Massive financial euphoria attached to stocks
2. Stocks are historically expensive
3. Fed tightening credit to get inflation under control

Spencer Jakab from The Wall Street Journal seems to agree with us. In a recent article titled, “A New Bull Market Can’t Start Until Investors Give Up,” he wrote the following:

“Dipping a toe back into the most-speculative assets because you believe everyone else has panicked isn’t the sentiment that underpins sustained turnarounds. In May, Google searches for “capitulation” hit their highest since October 2008, the month following the collapse of Lehman Brothers. The S&P 500 had by then lost 38% from its peak a year prior and it seemed like things couldn’t get any worse. They did: The bottom wouldn’t come until early March of 2009 after another 31% loss for the index.”

1968-1970 Bear Market

1. Cured the euphoric Go-Go years of tech stock mania connected to NASA going to the moon (sound familiar?)
2. Stocks were historically expensive
3. Fed tightened credit
4. Lasted 18 months and was a 36% drawdown

1973-1974

1. Nifty Fifty stocks collected all the financial euphoria
2. The 50 most popular stocks traded as a group at 41.9 times earnings
3. This bear market lasted almost 22 months and declined 48%

2000-2003

1. Dotcom Bubble in technology, telecom and the internet
2. Price-to-earnings (P/E) ratio of the S&P 500 Index was 29
3. Fed tightened credit to slow a booming tech-based economy
4. Bear market lasted 36 months and declined 40.1%

Back to Spencer Jakab’s article:

“Bear markets can be cruel. Following the bursting of the tech bubble in March 2000, the NASDAQ Composite Index had eight rallies over the ensuing two-and-a-half years, averaging more than 30%, that ultimately fizzled.”

2021-Unknown

1. All-encompassing financial euphoria episode. Biggest bubble in Charlie Munger’s career, because of the “totality of it.” Speculation in everything from FAANG stocks to tech stocks to innovation growth stocks to IPOs/SPACs, to cryptocurrencies and to meme stocks.
2. P/E ratio of 24 times profits on the S&P 500 Index
3. Fed tightening to cut down “wolverine inflation”
4. Has lasted six months and gone down as much as 22.4%

Should you be buying stocks because of how far they have fallen like folks did all the way down in 2000-2003? Does down 75% from the high make a stock a value stock? Will a seven-month bear market cure the sins associated with the mania of the last five years? We think not!

Therefore, it appears that history would tell us that this bear market has additional time to claw investors since the most analogous prior bears lasted a minimum of 18 months. The S&P 500 index could easily take an additional 15-25% out of current prices as the Fed tightens credit and P/E ratios compact. The irony of these previous examples is that the prior popular securities took years to become interesting to investors. Everyone wants to know if it’s too early to buy the formerly glamorous tech stocks. If history is any guide, it is way too soon to buy them. As always, fear stock market failure.

Warm regards,

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.

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