WARMING-UP IN THE BULLPEN: Investors cheering the rally in stocks this year should be prepared for the good times to end, and the S&P 500 risks seeing dismal returns for the next 10-15 years

Investors cheering the rally in stocks this year should be prepared for the good times to end, and the S&P 500 risks seeing dismal returns for the next 10-15 years.
That's according to Bill Smead, a top 2% fund manager who remains one of Wall Street's biggest bears, even in the face of the market's 8% rally in 2024.
That's because stocks look to be in the midst of a speculative bubble, he's warned previously, and it could set investors up for a "dead ball" era of performance, the Smead Capital Management founder said in a recent note to clients.
That "dead ball" period will last for at least the next decade, Smead said, and it will only end once all the enthusiasm for the market's most expensive stocks has bled out. 

The process could lead to losses on par with the dot-com bubble and the Great Financial Crisis, he said, when stocks suffered double-digit drops.

Stocks are headed for a decade-long 'dead' zone with losses on par with the dot-com bust, fund manager says

Jennifer Sor 

Apr 10, 2024, 11:27 AM PDT

Markets Insider - Business Insider

Stock Market Headed for a'dead' Zone With Dot-Com-Style Losses: Market Vet

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"It will be more like the '00-'03 bear market, or more like '07-'09," Smead said in an interview with Business Insider. "We'll probably get two full-blown bear markets in a 10-year time period that will basically negate making any money in the S&P 500 index. You won't want to buy the S&P 500 index until it becomes kind of a swear word." 

Smead thinks the losses could be fueled by stubbornly high inflation. The consumer price index has come in hotter-than-expected for the last three months, with prices accelerating 3.8% year-over-year in March, according to the Bureau of Labor Statistics' latest CPI report on Wednesday. 
That's making the economic landscape look precariously similar to the 1970s, Smead said, right before inflation spiraled out of control and led stocks to struggle.

Stubborn inflation raises the risk the Fed will keep interest rates higher for longer, and some experts, like JPMorgan boss Jamie Dimon, have warned interest rates could end up rising as high as 8%.

• "It just reeks of inflation," Smead said of the economy. 
• "We are entering an inflationary era, and that's going to cause a complete shift in what we like to call the investment zeitgeist … the stock market itself cannot do well when that zeitgeist is changing, because all the money is in [there]."

Investors have been eager to put their cash in AI stocks and mega-cap leaders like those in the Magnificent Seven, but Smead has repeatedly warned to stay away from overvalued areas of the market. He previously predicting that the most expensive stocks could plunge as much as 70% in value.
"Nobody ever talks about the massive percentage of growth stocks that carried euphoric prices, do poorly and get slaughtered," he said in a note last week.

That doesn't mean there won't be an opportunity to make money, even during a dead ball period for the market. 

Smead's firm remains bullish on "out of favor" investments that typically benefit from inflation, such as oil and gas, real estate, and gold."

In the dead ball era, we really found places to get hits and score runs," he said, pointing to the outperformance of those sectors during the 70s. "We're in that same situation."

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In baseball, the dead-ball era lasted from about 1900 to 1920. This era was characterized by low-scoring games and a lack of home runs; in 1908, the major league batting average dropped to .239, and teams averaged just 3.4 runs per game, the lowest ever. Spacious ballparks limited hitting for power, and the ball itself was "dead" both by design and from overuse. 

Ball scuffing and adulteration by pitchers, particularly the spitball, were allowed, putting hitters at a disadvantage.

The era ended very suddenly; by 1921, offenses were scoring 40% more runs and hitting four times as many home runs as they had in 1918. There is no consensus among baseball historians as to what caused the change.

Baseball during the dead-ball era

During the dead-ball era, baseball was much more of a strategy-driven game, using a style of play now known as small ball or Inside Baseball. It relied much more on stolen bases and hit-and-run types of plays than on home runs.^[1] These strategies emphasized speed, perhaps by necessity. Teams played in spacious ball parks that limited hitting for power, and, compared to modern baseballs, the ball used then was "dead" both by design and from overuse. Low-power hits like the Baltimore Chop, developed in the 1890s by the Baltimore Orioles, were used to get on base.^[2] Once on base, a runner would often steal or be bunted over to second base and move to third base or score on a hit-and-run play. In no other era have teams stolen as many bases as in the dead-ball era.