Despite warnings of an impending bear market, major indexes are up – a bunch. Since the low of March 9, 2009, the S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index are up 292%, 274% and 440%, respectively. Take that, bear people.
These stunning accomplishments have not silenced persistent bears like David Tice of Prudent Bear Fund. Tice now says to expect up to a 50% drop in stock prices. Of course, he also says there could be a 25% rally. To be clear Tice told CNBC that, "Longer term, I'm completely confident that this market will be down a lot."
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A Black Swan
Tice is concerned about high stock valuations but also about a major selloff sparked by a black swan event. A black swan is an unexpected event or occurrence that wasn’t predicted, something that comes out of the blue, so to speak. The term was popularized by former Wall Street trader, Nassim Nicholas Taleb after the results of the 2008 fiscal crisis.
Taleb argued that even though black swans are impossible to predict, their impact is so catastrophic investors must assume that a black swan event is always a possibility and plan accordingly.
Examples of Past Black Swan Events
In addition to the 2008 housing market fiasco, other black swans have included Zimbabwe’s hyperinflation in 2008 – the worst in the 21st century. The peak inflation rate at that time was 79.6 billion percent.
Another black swan event was the 2001 dot-com bubble, which had similarities to the 2008 crisis. Still another example took place when the previously successful hedge fund Long Term Capital Management (LTCM) collapsed in 1998 due to a debt default by the Russian government. This, as with all black swan events, was something that could not have been reasonably predicted.
Among Tice’s “black swan” concerns are the potential impeachment of President Donald Trump, aggression by North Korea, large swings in the price of gold or a crisis in the credit markets.
Others previously mentioned by Nassim Taleb include a major weather or climate catastrophe, a global shift in consciousness driven by wealth inequality, climate change and nationalism, a world economic collapse and even the discovery of a life-sustaining planet, something that could have both negative and positive consequences for everyone on Earth.
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Black swans are difficult to predict but not impossible to prepare for. Steps experts say investors can take include first, not attempting to time the market. Black swans are bad, but recovery does happen. Second, avoid a reaction of panic. If you know that’s your tendency, fight against it. Finally, get and stay diversified. Diversification is the best hedge against a black swan event because your risk is mitigated by the variety of your investments.