Mark Spitznagel, founder of Universa Investments, explained to CNBC during a Monday interview why he thinks that market participants should apply a modicum of caution as the S&P 500 SPX, +0.27% nears its first record closing high since the coronavirus-induced rout that rocked the economy.
Stocks plunged by more than 30% in the midst of the pandemic that has put millions of Americans out of work and forced scores of companies into bankruptcy.
Universa, a hedge fund designed to benefit from tail risks–those unpredictable events which can take place more often than one would guess, and therefore often are underestimated by the broader investment community–enjoyed a remarkable run-up in the age of COVID-19.
And although Spitznagel doesn’t appear to be ready to forecast more carnage ahead for investors, he suggested that the current environment is replete with land mines for complacent investors, with the broader market viewed as overvalued due to its stunning rally against an economic that is still on uneven footing.
The S&P 500 has rallied more than 51% from its lows put in on March 23, the Dow Jones Industrial Average DJIA, -0.30% has gained nearly 50% from that point, while the Nasdaq Composite Index COMP, +1.00% has climbed more than 62%, according to FactSet data.
“Stock market crashes happen as a direct result of overvaluation. I don’t think there are many people around right now that would argue against the fact markets are quite overvalued,” Spitznagel told CNBC on Monday.
“Maybe they’ll get more overvalued. I think that’s the argument for being long today is that …continued overvaluation and [they can] get even more so. But they’re overvalued and this is the setup up for left tail events in stock markets,” he explained.
“Black Swan: The Impact of the Highly Improbable” author Nassim Nicholas Taleb is an adviser to Universa.
