Being Too Early Is Indistinguishable From Being Wrong

One aspect of being a contrarian investor is making what appears to be an incorrect call on markets when they become expensive. When markets reach "the top," we imagine a single point. But a market peak is usually a process, and it may take six to twelve months before the fall actually begins. Up until that point, you look like a fool as markets climb higher, and folks take the time to let you know it. Especially those making hay while the sun shines.

During the falling process, which can be sudden like 2008, or take a few years like 2000 to 2003, or slower still like 1965 to 1982, we experience what are called bear market rallies, and some are substantial. They happened in 1929, 1973, 2000 and 2008. What made those declines different was that markets were in secular, not cyclical, bear markets: the aftermath of markets becoming extremely overvalued following a secular bull, where investors enjoyed above-average returns for an extended period. Think of the returns since the March 9, 2009 low.

Alas, it always comes to an end.

So the point is not trying to pick the top. It is ensuring you are well positioned when the decline comes, and having an idea of when the decline ends, so you can start investing in markets again.

This is not a pessimistic call. We believe commodities and emerging markets will do well, and it behooves us to make sure you do not lose money by being too greedy and pushing your luck a little too far. That by necessity means we will be early, and to some extent look foolish. But we can guarantee we will be among the last investors standing. Because we care about our capital, and we refuse to succumb to groupthink and recency bias.

The geopolitical and financial picture this week reduces to three pressure points. Each one is capable of moving markets on its own. Together they define the risk environment for the second half of 2026.

The dwelling price-to-income ratio across Australia now sits at roughly double its historical average. The arithmetic from here permits only three outcomes: prices fall, incomes rise, or some combination of both. What the ratio cannot do is stay this high forever.

And it is not just high by our own history. Australia continues to run property prices well above the US market, a market Americans themselves consider unaffordable. As we have noted before, look at the year 2000 on the chart below and you can see exactly where the boom started, and how far the two countries have since diverged.

The S&P 500 Shiller CAPE closed the week around 41.6, still second only to the December 1999 record of 44.2 across 155 years of data, and more than double the long-run median of 16. The implied return from these levels is roughly 1.8% per year for the next decade. Hold that number against Japan in the next chapter.

If you look at Japan when it carried the highest CAPE valuation ever recorded, you will also note the market then experienced a decline lasting more than twenty years. This is why we argue that "time in the market" will not deliver sufficient returns over the next decade. An investor who bought the TOPIX at the 1989 peak and simply held was still underwater in 2012.

But look closer at the shape of those two decades. The market did not fall in a straight line. It staged four enormous rallies on the way down, each one persuading buy-and-hold investors that the bottom was in.

Sometimes stocks do not trend. They range. A 137% rally over three years feels exactly like a new bull market from the inside. Buy-and-hold investors rode every one of those rallies back down. But an investor who understood how ranging markets operate, who took profits into strength and bought weakness, made real money across a market that delivered nothing.

This week's podcast is a special one: a full roundtable working through Howard Marks' Mastering the Market Cycle, the book that underpins much of the thinking in this issue. Steve, Tom and Jacob cover the psychology pendulum, the three stages of bull and bear markets, and what it all means for positioning right now. The full show notes document accompanies this edition.

We will continue to update the sector scorecards, momentum indicators and macro notes as the theme unfolds. If conditions shift, you will see it reflected in the Wells calls, Signals and Noise Premium updates and portfolio insights.