Nassim Taleb’s 2006 book titled “The Black Swan” is a must read for any human being with a pulse. In the book, Taleb describes a “Black Swan Event” as an event that no one could possibly imagine happening (akin to seeing a black swan for the first time when you are only accustomed to seeing white swans). The parallels to financial markets are many. The 2008 financial crisis, predicted by very few, could be considered a black swan event. The market crash of 1987 would be another.
This book in particular has gone a long way to helping Wall Street gurus think “outside the box”. Indeed, Wall Street talking heads are now focused on trying to predict the Black Swans for each year. For 2016 the list includes: Great Britain exiting the Euro Zone*, a large devaluation of the Chinese currency* and a devaluation of the Saudi Arabian currency*.
Of course, once everyone is talking about a possible Black Swan event then it no longer is a true Black Swan, and therefore the market reaction to such an event would be limited. Other than Black Swans, market participants are focused on the many negative issues affecting the market today – high P/E ratios, declining corporate earnings and slowing global growth to name just a few. These are all serious issues, but again, if everyone is aware of them how much impact can they really have on the stock market?
I do not think all Black Swan events have to be negative. What about a market-positive Black Swan event? At this moment, there is no money manager out there that thinks the market is going up by say 20% this year. No one. Try to find one – you can’t. Hedge Funds, Pension Plans, Institutions and others are all underweight (or even short) stocks due to the risk factors listed above. But what if all of the risk factors listed above were already priced into the market? Could the market rally significantly? Something to think about.
What could possibly push the stock market up 20% this year? I have no idea – but that is exactly what makes it a “Black Swan” event. No one knows for sure where the markets are headed for the remained of this year, but it seems to me that EVERYONE thinks the market can’t go higher. And when it comes to the stock market, the crowd is seldom correct. We may see a Black Swan event in the stock market in 2016, but it might not be the kind that everyone is expecting.
*From various sources including the Wall Street Journal.com