‘You’re going to see bad before you see good’: A portfolio manager at a $2.3 billion firm breaks down why the S&P 500 is staring down a decade of negative returns — and says 10-year yields going to 7% is ‘not outlandish’ amid a wave of inflation

  • As stocks sit at all-time highs, Cole Smead is warning of negative returns in the decade ahead.
  • Smead pointed to the historically high percentage allocation to equities in household portfolios.
  • He recommended investing in oil, shopping malls, and homebuilding. 
  • See more stories on Insider’s business page.

Cole Smead was at his daughter’s softball game when yet another piece of anecdotal evidence that stocks are near the end of a bull market cycle appeared.

When another person in attendance asked Smead, president and portfolio manager at Smead Capital Management, about his line of work, the individual felt compelled to bring up their own success in retail trading and the big gains they saw, Smead wrote in a March 3 note. 

It’s not the type of thing that happens at the beginning of a bull market, Smead argued. 

It was just the latest in a long line of such moments, he said. But beyond anecdotes, some data points also support this idea. Namely, allocation to equities in household portfolios is hovering near all-time highs — just under 40% — right at the highest levels seen during the dot-com bubble.

Cypress Capital

Put another way, investor exuberance is high, and that doesn’t bode well for index performance over the next decade, Smead said. 

“The last time we were at/near this level was 1999. The only other period that produced an elevated peak was 1969. In our vernacular, these two other eras led to 10 years of stock market failure,” he wrote.

And that’s exactly what he’s calling for now: a decade of negative returns, or what he deems “stock market failure.”

“This is going to be incredibly ugly for broad-based investors,” he told Insider on Friday. 

Below is a chart of the S&P 500’s performance from 2000-2010, when returns were negative.


Though he declined to say when exactly stocks might reverse course, he did let on that his outlook over the next 12 months isn’t exactly rosy. He also said that he expects to see at least two crashes of up to about 30% in the next decade.

“If someone said, ‘How do you feel about the next 12 months?’ — you’re going to see bad before you see good,” Smead said. “In 10 years to get that bad of returns… you’ve probably got to have at least two nasty bear markets.” 

With stocks indexes at all-time highs and valuations extended by some measures, Smead makes a case worth paying attention to. At the same time, many believe stocks are in the earlier stages of a new bull market cycle as the economy gets ready to reopen.

When asked why he thinks the broader market faces such poor returns when economic growth is just getting ready to pick up, Smead said he expects the economy to “suck up the capital” away from financial markets.  

He said this is already playing out in houses and autos. Housing prices are soaring currently amid low interest rates.

He also said that historically low household debt-to-service ratio — or the amount of disposable income consumers are allocating to debt — along with high savings rates will likely lead to soaring inflation and high interest rates.

“It’s not outlandish to say we could see 4-6% inflation and see a 10-year at 6% or 7%,” he said, referring to yields on 10-year Treasury notes. He said he expects inflation to grow at a minimum of 4% per year over the coming decade, as well as GDP. 

Smead’s views in context 

While some specifics of Smead’s views might not be widely shared, inflation and stock volatility going forward are expected by many.

Morgan Stanley’s Chief US Equity Strategist Mike Wilson echoed these sentiments in a November 2020 interview with Insider.

“I would argue that in this economic expansion, it’s likely that we get more inflation than in the prior two, and that will create what I would suggest would be shorter cycles,” Wilson said at the time. “Still bullish, but shorter cycles and more volatile cycles. So that’s a characteristic that I think is worth acknowledging.”

Bank of America’s Chief Investment Strategist Michael Hartnett also said on Thursday that inflation and volatility will be key themes in the market going forward.

There are also warning signs of overextension. The so-called Warren Buffet indicator — the ratio of total stock market capitalization to US GDP — is at an all-time high, signaling a poor outlook for stocks ahead. Bank of America has also recently said that their investor exuberance and stock valuation indicators, both shown below, are getting close to extremes. 

Bank of America Global Research

Bank of America Global Research

Even though Smead is bearish on buying the index, he still believes there are opportunities in the market. This is a view shared by some of the top investment banks, who think stock picking and strategic sector weighting is the best way to find returns from here. 

As for Smead, he most likes the oil, shopping mall, and homebuilding industries as the economic recovery and reopening ramps up. 

In the oil industry, Smead said he likes Continental Resources (CLR), ConocoPhillips (COP) and Chevron (CVX).

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