Are Tariffs Triggering a Black Swan?
In the world of investing, “black swans” are those rare, unexpected events that trigger unprecedented ripples across global financial markets.
Examples of recent black swans include the housing market crash of 2008, which sparked a worldwide recession, and COVID-19, which brought global supply chains to a standstill and caused the greatest spike in inflation seen in a generation.
It was the 2008 market crash that put the term “black swan” into the mainstream financial lexicon. A year before that downturn, analyst and academic Nassim Nicholas Taleb published The Black Swan, in which he argued that — because black swan events are impossible to predict yet can cause financial catastrophes — consumers, investors and businesses must recognize the signs and plan for their inevitability.
His black swan reference derives from the story that — until Australia was colonized — Europeans had only seen white swans; therefore, they assumed all swans were white, without deviation. When black swans were spotted in Australia, Taleb wrote, it automatically invalidated “millennia of confirmatory sightings of millions of white swans.”
No one was prepared for black swans until evidence confirmed otherwise.
Outliers and Extreme Impacts
So, how do we recognize a black swan event? In 2007, Taleb offered three surefire signs that one was imminent:
Using these three clues as a guide, many now wonder if we are in the middle of a black swan event caused by Trump's on-again, off-again tariff policies.
After all, the dollar and the Dow have both plummeted to record-setting lows due to tariff-related volatility. The normally reliable U.S. bond market has also been upended.
These events are indeed outliers and each brings with it an extreme impact. In keeping with Taleb’s three-part recipe, pundits and business leaders are now scrambling to provide context around recent events, all while the president doubles down on his trade war and criticisms of Fed Chief Jerome Powell.
So, what is an investor to do?
As I recently wrote, the tariffs have only intensified volatility already in place due to disrupted supply chains, increasing business costs and unforeseen global events.
I reminded readers that it’s key to remember that, historically, public equities have proven themselves to be resilient, capable of performing strongly despite market turmoil. As I wrote, “the S&P 500 Index has delivered an average annual return of approximately 10 percent during the last one hundred years across many downturns.”
Flexibility in the Face of Unpredictability
This is in no way meant to downplay the turmoil investors are now experiencing, nor to minimize the genuine concerns that a recession could be looming. However, these latest events suggest that — given the global connectedness of today’s markets — it might be wise to recognize that black swans may be more common going forward.
As we all saw during COVID, incidents in one corner of the world can send shockwaves around the globe. Some believe that diversification may offer a degree of protection as black swan events play out, but it may be wiser to construct flexible portfolios that bake unpredictability into the mix. Such investment strategies can’t guarantee safeguards from black swan volatility, but they may help investors be more resilient over the long term.
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All investments involve risk and some investments and investment sectors discussed may not be suitable for all investors. Please consult your financial advisor before making any investment decisions.