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COVID-19: The Black Swan

Daniel Schönberger profile picture
Daniel Schönberger


  • Last week was the fifth-worst week in the history of the US stock market and all three major US indices declined more than 10%.
  • The Coronavirus (COVID-19) could be the black swan, that has devastating effects on the global economy.
  • First numbers like the Official NBS Manufacturing PMI in China show how extreme the impact on the Chinese economy was.
  • Looking for a helping hand in the market? Members of Moats & Long-Term Investing get exclusive ideas and guidance to navigate any climate. Get started today »

We often tend to use superlatives. In my articles, I also use words like “rally” or “crash” quite often. But when talking about last week, superlatives seem to be appropriate as it was not only a week that might go down in stock market history, but also one of the worst weeks for the global stock markets ever. With the Dow Jones Industrial Average (DIA) losing about 3,500 points during the week (intraday it was even more than 4,000) it was the worst week for the US stock market since the financial crisis in 2008. Only in the final trading hour on Friday another day with a drop of more than 1,000 points was avoided, but for the week, the Dow Jones Industrial Average declined more than 12%, the S&P 500 (SPY) lost about 11.5% and the Nasdaq-100 (QQQ) ended the week about 10.5% lower. The two-year treasury yield declined 25 basis points to 0.86%, which is the largest one-day decline since the global financial crisis.

One might say, the bear return, but another animal and symbolic figure seems to be more appropriate: Out of the dark shadows, the black swan reveled itself and flapped its wings.

(Source: Pixabay)

The Black Swan

At this point, it makes sense to speculate if COVID-19 might be the infamous black swan, that can shock stock markets and bring economies to its knees. The concept of the black swan was made popular by the philosopher and essayist Nassim Nicholas Taleb and there are three criteria, that have to be met:

  • The event has to be a surprise to the observer
  • The event has to have a major (negative) effect
  • After the first recorded instance of the event, it has to be rationalized in hindsight, as it could have been expected

Right now, we don’t

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This article was written by

Daniel Schönberger profile picture
My analysis is focused on high-quality companies, that can outperform the market over the long-run due to a competitive advantage (economic moat) and high levels of defensibility. Focused on European and North American companies, but without constraints regarding market capitalization (from large cap to small cap companies).My academic background is in sociology and I hold a Master’s Degree in Sociology (with main emphasis on organizational and economic sociology) and a Bachelor’s Degree in Sociology and History.I also write about wide economic moats in my Substack: https://stockmarket101.substack.comI also write about investing, economy and similar topics on Medium: https://medium.com/@danielschonberger

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (12)

17 Mar. 2020
There are important several things to note about Covid-19 that will effect global economies.

The first and most important is the fact that while it came later to South America and Africa it is spreading there about as fast as it has in the Northern hemisphere.

Take a moment and think through the implications of that fact.

It means that this virus is adapted to warmer weather than the normal flu viruses are. In hindsight, the third demand for a Black Swan, this should have been an obviously predictable evolutionary response to global warming. This reality is why the CDC and White House have warned that the crisis may well go into August. It probably means that there will be no break, no end to it, no pause to catch up before regular flu season hits.

Second: It is asymptotically transmissible for several days, so unless you test every person repeatedly around the world, the idea of containment is probably moot, and there will be reservoirs constantly reseeding the population. This is probably here to stay until a reliable vaccine is found.

Third: Social distancing and lockdowns can't be done forever. At some point, there must be a return to some semblance of normal economic activity.

Eight weeks, I imagine, is going to be the outer edge of what the global economy and population can withstand without sliding into a depression in the economy and political restiveness in the populations. At that point, there will be a tidal wave of small and medium company bankruptcies no matter what the national governments do, not all can or should be saved. When/if the CDC announces the necessity of continuation of the distancing and business closures through the summer, things will get ugly in both arenas.

Fourth: While cash disbursals to the population are necessary for their survival, and the survival of those business sectors they will be paying, landlords, groceries, healthcare, communications and banks, there are many business sectors that can't be reached with direct aid to families, and not just bars, nightclubs, theaters, restaurants, arenas, airlines, and cruise companies. Others include printing, advertising, catering, custodial, laundries, trucking and many others.

I have serious doubts whether this administration, or any administration for that matter, has the capacity to effectively deal with the myriad of problems that are unfolding and will continue to unfold over the next few months.

Even if we somehow manage to get it under control by July, creating order out of the chaotic mess the economy will be in will be both a Herculean and Sisyphean task.
Market Sense profile picture
good article
garbage in, garbage out.Too little data, too many assumptions
David de los Ángeles Buendía profile picture
Hello @Daniel Schönberger ,

This not a Black Swan Event. Viral pandemics have occurred many times in the past. This one is hardly and different than the recent SARS and MERS epidemics. Even if the scale is larger, there have been pandemics that were extremely large. The Spanish Flu epidemic of 1918 killed tens of millions. There are ample precedents. That is not to say that there may not be major impacts, even catestrophic ones but that does not mean it is a Black Swan event.
You need to do much better research about this disease sir.
You just conformed the third point - that from the hindsight it will be explained as something that should have been expected. :)
necto profile picture
it is unfortunate that I read it just before bedtime
I think fear is coming soon. Irrational as it may be; panic will breed more panic. Plus internet lies
necto profile picture
@Rare profit I don’t think so, we’ll see a maximum of side trade for a couple of months, but black swans do not fly over us yet. Everyone around understands that the economic data for these months will be very bad, abnormally bad, and this was reflected in the correction of the past one and a half weeks in my opinion.
That would be a much happier outcome. I think the fear will start on Main Street. Been wrong plenty though; we will see.
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