by Gary Alexander
March 24, 2020
The “Black Swan” concept was popularized by Nassim Nicholas Taleb in his 2007 book by that name. His theory – that “black swan events” come out of the blue as a surprise, and hence have a major disruptive effect – was validated by the 2008 financial crisis, which helped him sell three million copies of Black Swan by 2011. Ironically, we have gone over a decade without a Black Swan event…until now.
The theory is that our brains “know” that all swans are white, so the sight of a black swan sends confusion to our brain, at first. It does not compute. It can’t be a swan. It must be something else. That delays our reaction until it’s too late. As a result, we lose precious time. We are stunned into inaction. In this case, the world (say, Italy and America) lose a lot of precious time in reacting to an attack like this coronavirus.
Over the last century, Black Swans have attacked us about once per decade – quite often near the turn of the decade – and often with devastating effects in terms of death toll or stock market declines, or both.
Here’s a rundown, in brief, over the last century of Black Swan flights, along with their tragic landings:
1919: Last week I discussed the Spanish Influenza attack of 1918-19, which killed 675,000 Americans and up to 50 million worldwide. It came as a shock after at least 10 million had died in the Great War.
1929: The next Black Swan had the adjective “Black” attached to it no fewer than three times: Black Thursday, October 24, 1929, followed by Black Monday and Black Tuesday, October 28 and 29, 1929. These days were shocks because the stock market declined over 10% in one day for the first, second, and third times in history, in short order. Overall, the Dow fell 48% from September 3 to November 13, 1929.
1939-40“>: Hitler’s invasion of Poland on September 1, 1939 launched World War II, but that was not a Black Swan event since he had been invading about one country each year, in an easterly and southern direction, since 1936. In fact, the stock market rose in early September 1939 in what was labeled “The Phony War” for the next nine months. What came as a shock, however, was his Blitzkrieg to the west through the low countries into France in May 1940. That’s the Black Swan that sent markets spiraling.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
1941: U.S. entry into World War II came later with our own Black Swan event – Japan’s sudden attack on Pearl Harbor on a sleepy Sunday morning, December 7, 1941, sending the stock market further down, to a low of 92.92 on April 28, 1942. Then in 1945, the Black Swan fell on Japan, as American GIs dodged the invasion of mainland Japan. The markets recovered, but another Black Swan flew in Asia five years later:
1950: On another sleepy Sunday morning, June 25, 1950, some 75,000 soldiers from the North Korean People’s Army poured across the 38th parallel, the boundary between the Soviet-backed Democratic People’s Republic of Korea to the north and the pro-Western Republic of Korea to the south, launching the first hot flash of the Cold War, sending some of those same soldiers back into a mainland Asian war.
The Monday after the Korean invasion, the Dow fell 4.7%. The next day, the market lost 0.8%, with volume the heaviest since Hitler invaded Poland in September 1939. From a June 12 high to a July 13 low, the Dow lost 14.8% in a month. However, the stock market rose during the rest of the Korean War.
1960-63: At the height of the Cold War, there was a shooting down of the U-2 spy plane (1960), the Bay of Pigs fiasco (1961), and the Cuban Missile Crisis (1962), but the real Black Swan event of the JFK era was the death of the young President on November 22, 1963, even though the market held firm afterward.
1970: The first tech stock crash came just after the first Earth Day – April 22, 1970 – call it “Crashing Back to Earth Day.” For the general public, the Black Swan event was the shooting of four innocent youths at Kent State on May 4, but in the five weeks surrounding that date (April 20 to May 26), many tech stocks lost up to 80%. The S&P 500 and the Dow each dropped 19% during those same five weeks.
1979-80: The major Black Swan event was the taking of 54 U.S. hostages by Iran’s Ayatollah Khomeini on November 4, 1979, which launched ABC’s “Nightline” coverage of that event. Then came the Russian invasion of Afghanistan the day after Christmas, sending gold to over $800 per ounce and the Dow down to 759 in early 1980. The U.S. was deep into “stagflation” at the start of the first double-dip recession.
1990: On August 4, Saddam Hussein invaded Kuwait in a shock that doubled the price of oil almost overnight and sent the Dow Jones index down 21.2% in less than three months, leading to a global coalition called “Desert Shield.” This came on top of a nearly 50% decline in Tokyo stocks in nine months and a burgeoning savings & loan crisis in the wake of Michael Milken’s junk bond redemptions.
2001: In the new century, we feared a silly bug called Y2K, but as usual “that which we fear most never happened” (simply because we expected it and worked hard to avoid it) but that which we least expected (the Black Swan) struck – in this case three jet liners hit the World Trade Center and the Pentagon out of a clear blue sky on Tuesday, September 11, 2001, closing stock markets and stopping all air traffic.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
2008: The last Black Swan event before this coronavirus epidemic was the Fed’s failure to rescue Lehman Brothers on September 15, 2008, sending the stock market into a tailspin the following week. Previously the Fed had brokered a merger for Bear Stearns and subsequently bailed out AIG and others, but not Lehman, causing investors to question the validity of their counterparty risk in financial transactions.
It was a terrible crash – the S&P 500 fell over 40% in 10 weeks – but it recovered in just over two years.
You could say that the swine flu (H1N1) that entered America in 2009 was another Black Swan event, but we never treated it that way. Few panicked, the market kept rising, there were no event closures, and life went on for a full year during the 12,000+ deaths from H1N1. That is not the case with coronavirus now.
There would be far more than 12,000 deaths from this coronavirus if we had not acted fast to separate ourselves from each other. Although we may have wasted precious time at the start of this crisis, we did the right thing and will recover – as we did from all previous Black Swan events over the last 100 years.
Scary headlines like these have happened in the past, and they generally accompany market bottoms, since there is no way to go much deeper into fear than the kinds of headlines pictured above. President Trump knows he doesn’t dare lock down the entire nation’s access to essentials like food and medical supplies, and neither will he shut down most businesses indefinitely. Smart, resourceful people will find a way to work from home or re-open businesses on a limited basis. Americans will dig deep to find hidden resources that were always there but lay dormant through years of partisan bickering; We can do it.
Black swans may look scary at first, but eventually they tend to bring out the best in us.
Also In This Issue
A Look Ahead by Louis Navellier
Lessons Learned While Driving from New York to Florida
Income Mail by Bryan Perry
The Cure for Coronavirus Might Be as Simple as Sunshine
Growth Mail by Gary Alexander
Black Swans Attack Us About Once Per Decade
Gary Alexander has been Senior Writer at Navellier since 2009. He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks. For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.
Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s. He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division. Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander
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