A new analysis by TS Lombard economist Steven Blitz reveals that the options market currently prices an 8-10% probability of the S&P 500 dropping 30% or more at some point in 2026. By examining S&P 500 put options expiring in December 2026, Blitz found their pricing aligns closely with historical averages. Since WWII, the S&P 500 has experienced 30%+ declines (peak-to-trough) at an average interval of 12.7 years. Post-1982, this interval shortened slightly to 11.8 years.
Blitz noted in the report: "An 8% probability matches historical frequency (one crash every 12.5 years), while 10% implies a one-in-ten chance."
**Crashes Cluster Together** However, Blitz warned that major market downturns tend to cluster—occurring in rapid succession followed by long calm periods. From 1966 to 1982, there were five 20%+ declines averaging just 3.7 years apart. In contrast, from 1982 to 2019, only three such drops occurred, spaced nine years apart on average.
The key differentiator was the trajectory of the "Misery Index" (unemployment rate plus YoY inflation). During the crash-prone 1966–1982 period, the index rose from 5.5 to 16. In the quieter 1982–2019 stretch, it fell back to 5.5. Currently, the index has climbed from 5.2 in 2019 to 7.4, suggesting the economy may be entering a phase of more frequent recessions.
**Gig Economy Mashes Weakness** Blitz highlighted the gig economy as a "safety valve" for unemployed workers, explaining why job losses haven’t triggered a surge in unemployment claims. "Driving Uber pays more than jobless benefits, has no time limits, and persists as long as high-end jobs remain stable—bolstered by steady or rising stock values," he observed.
Self-employed non-payroll workers jumped to 10.3 million in November from 9.7 million in September, while multiple jobholders rose to 5.7% of total employment—both highs since the 2008-09 recession.
**Stocks Remain Overvalued** Amid these economic headwinds, Blitz noted equities are overvalued by most metrics, with his proprietary liquidity index also signaling downward pressure. While consensus expects stronger 2026 growth and higher inflation, Blitz cautioned: "When an outlook seems this obvious, it rarely unfolds as expected."
He concluded that despite historically reasonable options pricing, mounting U.S. and global pressures, lofty stock valuations, and a rising Misery Index collectively suggest downside protection (puts) may still be underpriced. "This isn’t a crash forecast," he said. "But just as no one predicts their house burning down yet buys fire insurance, protection always looks cheap until you need it. That’s the point."
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