Black Swan Manager Sees Huge Rally, Then 1929-Style Crash -- Heard on the Street -- WSJ

Dow Jones
09/22

By Spencer Jakab

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Plenty of fund managers will tell you they're really bullish about stocks. Try finding one who says so yet stands to make a killing if prices collapse.

"I'm the crash guy -- I remain the crash guy," says Mark Spitznagel, who earned $1 billion in a single day for his clients during 2015's "Flash Crash." A protégé of "Black Swan" author Nassim Nicholas Taleb, his hedge fund, Universa Investments, also scored major gains when Lehman collapsed and when Covid-19 sparked a meltdown.

The alarming part of Spitznagel's current outlook is that he sees conditions akin to 1929, the year of the Wall Street crash. The silver lining for those hoping the bull-market music will keep playing a while longer: He thinks this is more like the early part of 1929 when stocks added significantly to their Roaring '20s gains.

How excited -- or worried -- should ordinary investors be? Take a deep breath and understand the way Spitznagel made those past killings. He wasn't reading the tea leaves and predicting the timing of stock swoons. Even the smartest trader couldn't know a pandemic or trading glitch was coming. Universa buys so-called tail-risk protection that loses money most of the time and then pays off hugely if a downturn is particularly sharp.

Other successful fund managers have drawn public attention with similar calls, and they occasionally get them right. In July 2024 Spitznagel himself sounded a similar tune, predicting " something really, really bad," but with a last hurrah for stocks first. The S&P 500 has gained 23% since then.

Market timing is notoriously difficult and often costly for individual investors who shift their portfolios on fearful headlines -- something Spitznagel pointedly doesn't recommend. Individuals who can't buy sophisticated tail-risk protection will still make attractive returns in the long run as long as they can hang on. Many don't.

"The biggest risk to investors isn't the market -- it's themselves," he says.

Timing aside, the euphoric and then cataclysmic scenario Spitznagel is describing could be good for his particular strategy. When investors are optimistic, his fund can purchase exotic tail-risk derivatives cheaply. His clients, mostly traditional investors such as pension funds, pay for protection so that they can more confidently reap the full benefit of rising markets.

The reason Spitznagel thinks the current bull market's comeuppance could be the worst since 1929 is repeated federal rescues of markets and the economy. He compares it to the practice of quickly extinguishing forest fires only to have too much dry tinder accumulate. Amid today's near-record stock valuations, the eventual "firebomb" could burn hotter.

Before that happens, though, he calls conditions such as Federal Reserve rate cuts ideal for the market to push higher, with the S&P 500 hitting 8000 points fairly quickly. That would be a 20% gain from today's level.

If a major selloff really is just over the horizon, big gains now wouldn't be unusual. Since 1980, the S&P 500 has returned an impressive 26% annualized in the 12 months preceding the start of a bear market. The final 12 months' rally was more than twice as high as that average ahead of the 1929 peak.

Both individual and professional investors tend to increase their stock exposure at times like today. Strategists at State Street noted last month that institutional investors' exposure to equities just reached its highest since November 2007, just before a vicious bear market. American households' allocation to stocks is also at a record, surpassing tech-bubble levels.

Two other signs that investors are throwing caution to the wind: The premium investors require to own investment-grade-rated bonds hit its lowest since 1998 on Friday and trading volume on U.S. stock exchanges was just shy of the April record during the Liberation Day panic.

"The markets are perverse," says Spitznagel. "They exist to screw people."

Write to Spencer Jakab at Spencer.Jakab@wsj.com

 

(END) Dow Jones Newswires

September 22, 2025 07:00 ET (11:00 GMT)

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