Euphoria-driven stock market highs risk painful downside, says ‘Black Swan’ investor

• Stocks have hit record highs this year as they enter the “Goldilocks zone,” says Mark Spitznagel.

• He says investors are overconfident amid immediate positive catalysts such as rate cuts and disinflation.

• Spitznagel believes the focus should rather be on the laggards that could cause stocks to fall sharply.

“Black Swan” investor Mark Spitznagel believes the stock market’s streak of record highs is a distraction from a more troubling reality that could come by the end of the year.

In a recent interview with Bloomberg TV, he said investors are currently enjoying a market that is in a “Goldilocks zone.” In his mind, there is too much focus on positive factors like disinflation and falling rates. That has built up overconfidence in the current market.

Instead, Spitznagel says they should focus more on catalysts that have a longer lag time and could send markets spiraling once they arrive. However, any kind of recession could take longer, he acknowledged.

“I think this is going to go on more in a kind of pure euphoria before it’s over,” he said.

Spitznagel specifically referenced the recent non-inversion of the yield curve, which has historically been a reliable recession indicator.

“When the yield curve inverts and then inverts, the clock starts ticking and that’s when you enter black swan territory,” Spitznagel told Bloomberg. “Black swans are always lurking, but now we’re in their territory.”

Spitznagel said traders should be more focused on where the market will be next year as the Fed cuts rates. In his view, the Fed was wrong to raise rates so much during the most recent tightening cycle, and the economy will be forced to deal with those effects eventually.

“We have to look back to ’22 and what happened there. There was a massive increase, a massive tightening that took place in the economy. Personally, I thought it was a huge mistake at the time,” he said.

This is not the first time Spitznagel has raised warning signs about the economy. He warned of a stock market crash in January 2023 and in July said the years-long bull market had become the “biggest bubble in human history” and its burst would lead to a recession .

Spitznagel runs Universa Investments, a fund that hedges bets on “Black Swan” events such as the stock market crash of 2008, the flash crash of 2015 and the onset of the COVID-19 pandemic in early 2020. When such events occur, Spitznagel capitalizes on the sudden dislocations.

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