Black Swan: A 40 Percent Correction?


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.

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Critics may argue that this is a convenient conclusion for the Santa Monica, Calif. based Universa, which manages about $6 billion in assets—essentially by taking a small portion of each of each client’s portfolio and using it to buy insurance that would hedge against losses. But in a telephone interview Wednesday, Spitznagel argued that “this is very general broad market research,” and that he’s “telling it like it is.”

This research, he added, “is not going to change the price of options right now.”

Mark Spitznagel
Photo: Susan Hall
Mark Spitznagel

Spitznagel acknowledges that some market watchers may argue that price-to-earnings multiples provide a far less dire prescription. But multiples give “zero indication” about future performance, he added.

The S&P is up about 1 percent so far this year.

Taleb, who is Universa’s “chief scientific advisor” and has managed money with Spitznagel for a number of years, was not involved in the preparation of the paper.

But Taleb’s involvement with the firm has brought it notoriety in recent years—particularly once the theory he articulated in his popular 2007 book, “The Black Swan,” that unexpected world events can have an outsized importance in history, tapped into the zeitgeist of the financial crisis that followed.

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