The stock market is expected to deliver lackluster returns for the next 10-15 years, according to investment veteran Bill Smead.
Bill Smead, the Chief Investment Officer of Smead Capital Management, has been cautioning about the future trajectory of stocks for some time.
He warns that persistent inflation will significantly impact S&P 500 returns for years to come, as highlighted in his recent letter to clients.
“We assume the S&P 500 Index is going nowhere for 10 to 15 years and the inflation ‘zeitgeist’ is here to stay,” Smead stated.
In a previous note, Smead drew parallels between the current macroeconomic conditions and the 1970s, a period marked by high inflation and elevated interest rates, which led to a “dead ball” era for stocks. He suggests that the new inflationary period could create a similar “dead zone,” potentially resulting in double-digit stock losses akin to those experienced during the dot-com crash and the Great Financial Crisis.
While inflation has cooled significantly from its peaks a few years ago, thanks to the Federal Reserve’s tightening of monetary policy, consumer prices still rose 3.4% year-over-year in April. This remains well above the Fed’s long-term target of 2%.
Smead also pointed out that inflation could worsen in the coming years due to large public debt levels. The federal debt currently stands at approximately $34.5 trillion.
“We’ve run massive fiscal deficits for years, and there are three ways to balance the budget. You can cut the budget, raise taxes, or inflate your way out by paying it back in devalued American dollars,” Smead explained, noting that the first two options are unlikely due to political constraints.
Other bearish forecasters have similarly predicted a challenging road ahead for stocks, particularly with the US potentially facing a recession within the next year. New York Fed economists have estimated a 50% chance of a recession occurring by April 2025, according to their latest forecast.
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