A “black swan” event refers to something unexpected happening. It’s called a “black swan” because everyone knows swans are white.
At least everyone thought swans were white until 1697. That’s when a Dutch explorer discovered black swans in Australia. It was completely unexpected, hence the name.
And these black swan events can – and do – descend on capital markets.
The coronavirus is an example.
However, this coronavirus isn’t the first to descend on humans and markets.
In 2003, another coronavirus, tagged with the name SARS (severe acute respiratory syndrome), descended on mankind and markets – like a black swan.
More than 800 people were infected and almost 800 died.
U.S. and global stocks fell until SARS was declared contained in March 2003.
While some sectors of the market, namely airlines, fell as much as 30%, the market as a whole fell only 10% from when SARS was first identified in November 2002 until the following March.
Coincidentally, in March 2003, the U.S. invaded Iraq.
By the end of 2003, with SARS and the Iraqi army vanquished, stocks ended the year 26% higher than where they started.
It’s a black swan – even though coronaviruses are known – because no-one expected it to happen (well, at least when it started, how fast it spread, and how many people are infected over so many countries).
We are officially in the shadow of a big black swan.
Some people say history repeats itself. Philosopher George Santayana once said, “Those who cannot learn from history are doomed to repeat it.”
We’re dealing with both now.
History is repeating itself. A coronavirus has returned and stock markets around the world are selling off.
Are we doomed? No, at least not this time.
But markets may be doomed for a while.
Eventually, things will get back to “normal,” stocks will rebound, then we’ll see new highs, and then higher highs, and so on and so on.
It’s just not going to happen overnight.
There are too many unknowns this time. No one knows where this new virus came from, how many people were infected before it was identified; no one knows how many people became infected as it spread across the globe, and; no one knows how many people are going to be infected.
And if that sounds scary, there’s something worse out there. No one knows if this virus will be able to mutate fast enough to outrun cures that have yet to be created.
Now is not the time to bottom fish, not the time to buy the dip, not the time to carry on as if history will repeat itself in any kind of similar timeframe while stocks end the year a lot higher.
That could happen, this could pass, and the bull run could continue.
But, first, the world’s got to get a grip on this black swan and cut its wings off.
Be very careful out there.
I’ll be back with you tomorrow with any updates.