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Mar92020

Money Matters - Corona Virus the Black Swan

With the Dow Jones Industrial Average (DJIA) having the largest point drop in history last week, as well as setting the record for the fastest period from new high to the official correction status which is a 10% sell off or greater in a record setting 6 days, investors still reeling from the stomach turning fall in the markets may be wondering if it’s all over.

 

Unlike a particular country having political risks or a tsunami rolling over an island nation where as the  damage would be confined to a particular region, the Corona virus scare will likely have worldwide ramifications. It is not so much the lethality of the virus itself (which has about a 3% mortality rate and far less than the SARS or MERS outbreaks) but rather the fear it instills in people in all corners of the globe.

 

Now called Covid-19, the event has gone global. Whole cities and towns are in lockdown, airlines and cruise ships are altering their schedules, supply lines are being interrupted and vast consumer markets on the demand side of things have ground to a halt. All of this translates into a worldwide slow down likely affecting many companies throughout the global stage and possibly causing serious damage to their economies.

 

Indeed, there have been earning warnings from some of the biggest companies, and one only has to look at the evening news to understand the possible scope of the paralysis. Sunday night when I penned this reveals Dow futures down another 500 points. What transpires when this goes to print is anyone’s guess.

 

CNBC states the financial conglomerates JPMorgan, Citi and Goldman Sachs all concur there hasn’t been enough pain to call a bottom yet and many analysts agree with them. There is that much uncertainty.

 

With the Dow falling back to 2019 levels and beyond, investors are likely seeing more red than they have  in years. The additional pain of “giving it all back” likely adds to the frustration. It wasn’t so long ago when the 2018 October to late December crash significantly decimated investor balances only to rebound in the stock blast off that was year of 2019.

 

Although 2020 appeared to start as more of the same up and away direction, the virus event emerged late January into the proverbial “Black Swan” market event it has turned out to be. Black Swan events can take down even the most resilient of market rallies. The term Black Swan refers to the rarity and unpredictability of the occurrence of such a creature. Black Swan events are rare and difficult if not impossible to predict. 9/11 or the Indonesian Tsunami are examples of Black Swan events. 

 

The rise of the Covid-19 virus certainly qualifies as a Black Swan.

 

The difference and uniqueness of this event is whereas 9/11 and the Tsunami occurred and concluded in the same day, the current virus event has an unknown duration and at this point in time unmeasurable consequences. We simply do not know how far and fast it will spread, when it will stop and how long lasting and widespread its effect will be.