The Fed will only cut rates in the event of a recession and stock market crash: Black Swan Investor

• Investors should be wary of upcoming Fed rate cuts, warned Mark Spitznagel, investor at Black Swan.
• That’s because the Fed only cuts rates in response to a weakening economy, Spitznagel told Reuters last week.
• The United States could experience a recession and a major stock market crash before rates fall, he predicted.

The rate cuts decided by the Federal Reserve may not be the boon that investors are hoping for. Indeed, the Fed will likely only ease monetary policy when the economy is hit by a recession and the market is struggling, according to famed “black swan” investor Mark Spitznagel.

In a recent interview with Reuters, the CIO of Universa Investments issued a stark warning about stocks and the economy.

According to the CME FedWatch tool, investors expect one to two cuts in 2024, which should be bullish for stocks.

But the Fed will only be able to cut rates if central bankers see a significant weakening in the economy — meaning the U.S. could see a slowdown and market drop before interest rates fall, a warned Spitznagel.

“Be careful what you wish for,” Spitznagel told Reuters. “People think it’s a good thing that the Federal Reserve is dovish, and that they’re going to cut interest rates… but they’re going to cut interest rates when it’s clear that the economy is turns into a recession, and they will cut interest rates in a panic when this market collapses.

Most economists think the United States will likely avoid a recession this year, according to a survey by the National Association of Business Economics. But high rates still threaten to trigger a slowdown by tightening financial conditions for businesses and households. The potential for an economic correction is especially strong considering the enormous amount of debt incurred over the past decade, when interest rates were extremely low, Spitznagel said.

“This economy is built on low interest rates,” he said. “There are lag effects when you revise interest rates like we did.”

Spitznagel’s hedge fund is known for its ultra-bearish market positions, counting “The Black Swan” author Nassim Taleb among its advisors. Both commentators have issued stark warnings for stocks and the economy over the past year, with Spitznagel in particular warning of one of the biggest debt bubbles in history, which could trigger the worst collapse scholarship holder since 1929.

Universa’s investment strategy is poised to benefit from the seemingly unpredictable Black Swan events. Famously, the fund achieved a 4,144% return on investment during the pandemic stock market crash.

Most Wall Street forecasters share a cautiously optimistic view of stocks and the economy for the rest of the year, assuming inflation continues to fall while the economy continues to grow. 38% of investors say they are optimistic about stocks over the next six months, according to the latest AAII Investor Sentiment Survey.