The weeks ahead should prove telling as the globe is “a buzz” with potential Black Swan Events that could send this market into a tail spin at any moment. Ebola, Ukraine, ISIL, China, take your pick. One by one, markets across the globe have been falling and now it appears to be our turn.
Black Swan Events are rarely the direct cause of market crashes but they can provide the catalyst for an already weak market to reverse course.
When the market is strong, (i.e. earnings rising at the same velocity as stock prices), a Black Swan Event can actually create a buying opportunity. Once investors realize that the event will not have an adverse effect on earnings, the market will likely rise back to pre-event levels.
But when the markets are weak, (i.e. market prices rising faster than earnings and revenues, and/or earnings showing signs of weakening), a Black Swan Event can ignite a powerful chain reaction causing the market to crash quickly.
Stock prices have been rising faster than revenues and earnings for over 2 years and global economies have increasingly been sporting signs of weakness since last January. To make matters worse, any one of the potential top 4 “Black Swan Events” mentioned earlier, could send the global economy into a deep recession. To top things off, the Bond Markets are already a crowded place which is where stock investors typically seek refuge. A rush to Bonds could cause the Bond Market Bubble to burst.
Historically speaking the stock market has seen some of its scariest days in the month of October.
October 28, 1929 down -12.8%
October 29, 1929 down -10.2%
October 19, 1987 down -22.6%
October 13, 1989 down -6.91%
October 27, 1997 down -4.5%
October 9, 2007 market peak before Great Recession
October 6-10, 2008 down -18%
We just may be witnessing the formation of the “Perfect Storm”.