The S&P could be bound for a correction of 40 percent or more in the next three years, according to a research paper issued by Universa Investments, otherwise known as the “Black Swan” fund for its affiliation with author Nassim Taleb.
Universa, which helps its clients brace for the worst potential market scenarios by purchasing options and other forms of insurance against downturns, argues in a June 13 paper that today’s stock valuations, put in the context of 110 years of stock-market history, are poised for a deep decline.
“At current valuations…there is…a 20 percent chance of a well-over 40 percent correction in the S&P 500 within the next few years,” argues the paper, authored by Universa chief investment officer Mark Spitznagel.
To prepare the paper, Spitznagel studied a century of performance by S&P 500 stocks (for the period before the index was established, he used a comparable stock basket developed by economics professor Robert Schiller). Applying a metric called the Q ratio—or the total market value of a company divided by its total assets—Spitznagel found that at today’s Q ratio of 1.04, stocks should be poised for huge declines.