The trader who predicted "Black Monday" is expecting a new crash. Why does he care about IPOs?
Paul Tudor Jones, who predicted the 1987 crash, warns that mega-allocations of stocks like SpaceX could lead to a 30-35% market crash
Jones sees a possible catalyst for the next collapse as a sell-off of shares by insiders of companies that have made mega-placements on the stock exchange / Photo: Invest Like The Best
The U.S. stock market may soon face a major collapse, says Paul Tudor Jones, founder and chief investment officer of Tudor Investment. He famously predicted the 1987 market crash - when the Dow Jones index lost more than 20% in a day. Now Jones says the situation may repeat itself: stock valuations are too high, the share of the stock market in the U.S. economy has reached historic levels, and a wave of insider selling after major IPOs could put pressure on the market.
Why the market has become vulnerable
The main problem doesn't come down to high multiples, Jones told the Invest Like The Best podcast, which came out this week but was recorded in February, before the war in the Middle East began. The risk, Jones said, is that the U.S. has become too dependent on a persistently expensive stock market. According to the investor, the capitalization of the U.S. stock market is now more than 250% of GDP. By comparison, he estimates that it was 65% at its peak in 1929, about 85-90% in 1987, and 170% in 2000.
"We are definitely in a sovereign debt bubble. In terms of the stock market, the country is too overweight in equities: we are now seeing the highest share of equities in private investors' portfolios ever"
With the size of the market, the possible 35% drop that Jones is talking about becomes more than just an investor's problem. About 10% of U.S. tax revenue comes from capital gains taxes, he says. If the market falls sharply, those revenues could go to zero - and then, Jones warns, a chain reaction would ensue.
"You can see the budget deficit widening dramatically, you can see the bond market getting hit hard. You can see this kind of negative self-sustaining effect, and it's seriously alarming"
IPO as a possible trigger
Jones sees a separate risk in large IPOs expected in the coming year, such as SpaceX. He considers a possible catalyst for the next fall to be not the companies going public, but the moment when insiders will be able to sell shares after the end of the restrictive period.
Jones compares this risk to the dot-com crash of 2000, when the Nasdaq Composite Index fell 39%. He says the 2001-2002 bear market was a consequence of the 1999-2000 IPO wave: after restrictions on selling were lifted, the market faced a constant influx of new shares.
"I don't think it's necessarily going to happen instantaneously with the IPO, but later on the removal of selling restrictions will start to happen. We may end up seeing a situation where the market goes through a stretched top stage, and six or eighteen months from now, you have to look at the timeline of buybacks and removal of selling restrictions. That's worth keeping an eye on because it will increase the supply of stocks, while buybacks will decrease because of the capital expenditure commitments of the major technology companies"
When Jones is expecting a collapse
Jones is not expecting a market crash this year, he is describing a scenario for the next few years.
"If you look at the frequency of significant bear markets, since 1970, the market has returned to average levels about once every 10 years," he said
For the current market, such a pullback, according to Jones, would mean a compression of stock valuations to the average levels of recent decades. At today's multiples, that translates into a downside scenario of about 30-35%.
If we consider the last major market crash to be the S&P 500's collapse from its peak of about 34% at the start of the coronavirus pandemic in 2020, then Jones' logic suggests that the next crash will occur around 2030. True, the S&P 500 also fell in 2022, down 19% for the year. If we take this decline as a starting point, then Jones's projected collapse shifts by two years.
What a private investor should do
Jones does not give specific advice on how to act in anticipation of a possible collapse. His recommendation is related to the very idea of a long-term investment in the S&P 500 and the willingness to buy the index regardless of current valuations.
According to Jones, the problem is not the index itself, but the price at which an investor enters the market. Long-term statistics of the S&P 500 were formed, among other things, from periods when U.S. stocks were much cheaper than they are now.
"The problem is that if you buy the S&P 500 at current valuations, with the P/E of the S&P 500 at 22, the return over a ten-year horizon is negative. That's what history shows. Yes, the S&P 500 is a great long-term instrument if you have a 100-year horizon, but that's an average over 100 years, including periods when the P/E of the S&P 500 was six, seven or eight - that is about a third of the current level. So valuation is very important: the stock market is at very high levels right now, and it's going to be extremely difficult to make money from that level in any kind of long-term horizon
This article was AI-translated and verified by a human editor
