High stock valuations have investors on edge about the next stock market crash. Famed trader Paul Tudor Jones, who famously predicted the 1987 crash, isn’t just worried—he’s envisioning exactly how the next big one could play out.
The founder and chief investment officer of Tudor Investment, which has more than $100 billion of assets under management, Jones laid out his view of how and when the next bear market could hit and how big of a wallop it could pack. He gave this analysis during a guest appearance on Patrick O’Shaughnessy’s Invest With the Best podcast.
First the good news: Jones didn’t predict a crash anytime this year. Instead he mapped out a scenario in which a reversion to the mean price-to-earnings ratios of the past 25 to 30 years would happen sometime in the next few years.
“If you think about the periodicity of significant bear markets, since 1970 we get kind of a mean reversion about on average every 10 years,” he said. Considering the 2020 S&P 500 drop of around 34% at the start of the coronavirus pandemic as the last big one, that could make the next crash due within a few years. (The S&P also fell 19% overall in 2022.)
The catalyst for the next crash, as he sees it, would be when employees and other insiders at companies that are expected to go public in the next year are allowed to cash in their IPO shares. There are several big initial public offerings expected, such as SpaceX and fintechs Chime and Stripe, among others.
The bursting of the dot-com bubble in 2000 was also preceded by the expiration of these so-called lockup periods. The tech-heavy Nasdaq Composite fell 39% that year.
The economic impact of the next crash could be particularly devastating because valuations of U.S. equities are at historic highs relative to the gross domestic product, he said. Whereas in 1929 the stock market valuation to GDP ratio was 65% and in 2000 it was 170%, according to his estimates, it’s now more than 250%.
The result of a 35% stock market tumble, in Jones’ view? Tax revenue from capital gains would fall to zero, causing the budget deficit to balloon even further, among other ugly outcomes. “You can see the budget deficit blowing up, you see the bond market getting smoked. You can see this kind of negative self-reinforcing of fact, so it’s troubling.”
Jones also had a takeaway for everyday investors wondering whether they should stay the course with the S&P 500 despite current sky-high valuations. “The stock market’s really high, and it’s going to be really hard to make money from here, I think, with any kind of long-term view.”
“You have to be cognitive of that fact when you’re thinking about how you have your money deployed,” he added.
Write to Anita Hamilton at anita.hamilton@barrons.com
