Black Swan Events

Naysayers and doomsters have been predicting a drawback in markets for some time and, as usual, they failed to identify the cause.

The spread of the COVID-19 Coronavirus has put the media into an apoplexy and given politicians a ‘get out of gaol free’ card.

Curfew is slowly being rolled out in the UK in alarming fashion, which must be exceptionally worrying for vulnerable individuals over 70 years of age.

​From the standpoint of investment markets, the drawback in values is almost meaningless as no valuation metrics can be placed upon the potential impact of the coronavirus spread and its duration.

​It is important to remember that, over the recent past, we have lived, worked and invested through many black swan events.  Many of you will be able to recall more than I have listed below.

•    1968/70 – The Vietnam war was at its worst, with massive social unrest in the USA. President Johnson was on his knees and about to be replaced by Richard Nixon. The markets fell by 36%. Nixon got the US out of Vietnam. Duration of markets downturn was 18 months.

•    1973/74 – Yom Kippur war between Israel and the Arab countries leading to a global oil crisis (I seem to remember that the price of oil quadrupled) – not good for economies. Markets fell by 48%. Duration of markets downturn was 21 months.

•    1980/82 – Stagflation. US interest rate policy resulting in stagflation. Stagflation is when inflation is getting out of control whilst at the same time unemployment is increasing. Markets fell by 28%.  Duration of markets downturn was 21 months.

•    1987/88 – Black Monday. This was largely an accident. The major world stock exchanges were moving to computerised trading. This meant that human common-sense intervention was being removed from the equation.  A bit of unexplained red appeared on the screens, causing a panic.  The computers started selling and could not be stopped. Markets fell by 34%. Duration of markets downturn was 3 months. Stock markets have since introduced circuit breakers.

•    1990/94 – Economic Depression.  An economic downturn was driven by restrictive monetary policy by central banks in response to inflationary pressures.  Key drivers were the 1990 oil price shock, the end of the cold war and the subsequent reduction in defence spending.

•    2000/02 – The Tech Bubble.  Technology, Media & Telecommunications company shares were driven ever higher by unrealistic expectations.  Investors were piling in on the back of the promise of untold riches from start-up TMT companies, with no track record and making no profits. Unsurprisingly, reality dawned and markets fell by 34%. Duration of downturn was 30 months.

•    2007/09 – The Banking Financial Crisis. This is recent enough for all of us to remember quite clearly. Most of the crooks got away scot free and bad banking practices went unpunished with tax payers left to carry the can. Markets fell by 56%. Duration of downturn was 17 months.

•    2020/? – Coronavirus – still in play – but, undoubtedly, overdone.

Our advice to our clients over all these periods was to stay in the markets and this paid off. 

The market falls set out above were from peak to trough. From trough levels markets were already starting to recover, so the duration of the downturns set out above, in reality, are overstated.

Investor psychology is such that non-advised clients tend to sell when the markets have gone down and buy when markets are buoyant, sometimes referred to as the herd instinct, resulting in financial loss and a poor investment experience.

We shall be monitoring the situation on a daily basis and our advice is to remain invested in your “best of class” investments, which have consistently provided above average investment returns, relative to your peer group, with below average volatility.