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3 Black Swan Event Examples From the Market’s Past

  • As recession fears continue to build steam, some investors are beginning to consider historical black swan events.
  • Black swan events are unexpected, devastating, economy-wide occurrences frequently considered obvious in hindsight.
  • The 2008 housing market crash, dot-com bubble burst and 1929 Great Depression are all viewed as black swans.
black swan events - 3 Black Swan Event Examples From the Market’s Past

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Amidst stubborn inflation, mounting recession fears and ruinous global supply chains, many economists are beginning to make comparisons to historical black swan events as guidance for our uncertain future. This begs the question: what is a black swan?

An event must meet three criteria to be considered a black swan. First, it must be a surprise phenomenon. Second, it negatively affects a wide swathe of people. Finally, it is generally considered obvious hindsight. These bombshell occurrences greatly deteriorate productivity and economic growth, and reduce the quality of life for nigh everyone in a country.

Note that to truly be a black swan, the event has to meet all three metrics. This means something like the initial Covid-19 pandemic, which many data models had long predicted, is technically not a true black swan.

With Russia’s invasion of Ukraine, the Federal Reserve’s last-ditch efforts to ease inflation and growing concerns over the BA.5 Covid-19 strain as well as Monkeypox, uncertainty and fear are palpable both domestically and abroad. In fact, as per CNN’s Fear and Greed Index, markets have been pricing in “Extreme Fear” for months on end.

As speculations that the world is heading toward a recession continue to swell, black swan events from days prior may prove informative in understanding what one of these unfortunate dark horses may look like in 2022.

3 Black Swan Events From Market’s Past

1. The 2008 Housing Crisis

The 2008 housing market crash and resulting recession was and is often considered the last true black swan event. As mortgage-backed securities began failing en masse due to widespread home loan defaults, a number of major banks were at risk of going under.

Millions lost their homes and much of their savings as a consequence of the real estate market taking a drastic turn for the worst. The government and Federal Reserve had to step in and bail out a number of at-risk financial institutions to prevent a wider collapse of the economy, but the damage was already done. The world was plunged into “The Great Recession.”

Real estate was considered one of the shining sectors of the U.S. economy. Many believed housing was so stable, the notion of a housing market crash was considered more fantastical than realistic. It came as a shock that the entire economy could fall solely as a consequence of an unstable housing system.

In hindsight, banks earnings billions off of risky loans seems like a recipe for disaster, as pointed out by films like The Big Short.

2. The Dot-Com Bubble Burst

The 2001 dot-com bubble burst is another frequently-referenced example of a black swan event. In the early 2000s, the internet and internet-based businesses were a hot new trend. Despite a limited number of users and an even more limited number of use-cases, internet companies saw their value skyrocket.

When several of these inflated companies ended up defaulting, the entire industry became subject to intense scrutiny. What followed was a domino effect of investors withdrawing their stakes in these “high-growth” internet companies. This eventually spiraled into a country-wide recession, all stemming from seemingly innocuous investments into a promising new field.

3. The Great Depression

Perhaps the single most infamous black swan was the 1929 Great Depression. Likely the most devastating economic event in U.S. history, the entire world fell into a deep and cataclysmic depression. Its origins were as unexpected as its effect on the global economy.

On Oct. 29, 1929, otherwise known as Black Tuesday, the U.S. stock market crashed. Economists are still split regarding the exact causes behind the crash and severity of the subsequent depression. One theory is that a shrinking money supply was the determining factor in the downturn. Other potential factors were linked to high unemployment rates and low demand. Regardless, the event was largely unprecedented — even by modern standards.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.


Article printed from InvestorPlace Media, https://investorplace.com/2022/08/3-black-swan-event-examples-from-the-markets-past/.

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