NEW YORK (Reuters) – According to Universa Investment, a hedge fund focused on tail risks, market enthusiasm has driven inventory up by an additional 20%.
The S&P 500 index saw a gain of about 13% this year, hitting a record high on Monday after the Federal Reserve cut interest rates for the first time since December.
It seems that the central bank is indicating more cuts could be forthcoming, which some believe might boost Wall Street and balance out a potentially weakening labor market.
Mark Spitznagel, the Chief Investment Officer and founder of Universa, thinks stocks could increase another 20%, pushing the S&P 500 from its current level—around 6,653 points—to over 8,000 points.
Yet, he cautions that this upswing might be accompanied by significant turmoil, as the U.S. economy is still likely to face challenges from high borrowing costs.
“I expect an 80% crash…but only after a massive, euphoric, historic blow-off rally,” Spitznagel mentioned in an interview. “We’re in the thick of it now, but it’s not over.”
Universa, based in Miami, manages around $20 billion and focuses on protection against “black swan” events—those unexpected market shocks—using financial instruments like credit default swaps and stock options, which tend to gain in value during extreme market disruptions. Since its inception in 2007, it has yielded returns exceeding 100%.
Investors often see tail risk funds as a form of insurance; although their costs might drag on performance during calm periods, they can pay off significantly during crises. Universa demonstrated its value in 2020, emerging as a key player amidst the market chaos triggered by the Covid-19 pandemic.
“Universa represents the most bearish viewpoint on the market, and our clients engage us to extend their market positions…it sounds paradoxical,” Spitznagel noted.
Last year, he suggested that investors should take advantage of the market’s “Goldilocks” moment, a period of hope that the Fed could control inflation without harming the economy, predicting that this euphoria would eventually lead to a downturn.
In another conversation late last year, Spitznagel asserted that a U.S. recession was imminent after the Fed began to ease monetary policy.
Since then, the economy has made some progress, but Spitznagel maintains that it remains propped up by overly loose monetary policy since 2008, and he believes the true consequences of the sharp shifts brought on by the pandemic are yet to be fully realized.
