Developed by the Lebanese mathematician and scientist Nassim Nicholas Taleb, the Black Swan theory refers to the discovery of black swans (a species hitherto unknown in Western countries) in Australia in the 17th century. In essence, the theory posits that extremely rare and unpredictable events can have a disproportionate impact on our world. This metaphor, when applied to the financial sector, relates to the fact that unexpected economic, social or geopolitical events that are impossible to predict can trigger abrupt market crashes.
Creand Wealth Management, the private banking specialist, analyses the major Black Swans that have caused the biggest stock market declines in the last century.
- Crash of ‘29 
It is impossible to talk about Black Swans without mentioning the Crash of ‘29, the most profound fall the market has ever suffered and which lasted 33 months, taking the Dow Jones index performance to 86% below its peak. Easy credit, high levels of retail indebtedness and exaggeratedly high valuations were the trigger for massive sell-offs. A scenario that, in the span of one week, resulted in the impoverishment of thousands of households and the tightening of previously lax credit facilities, leading to the bankruptcy of a large number of companies that were unable to meet their cash flow needs. The steepest single-session decline occurred on Tuesday 29 October 1929, when the market fell by 12.8%.
- Dot-com Crash 
With the advent of the World Wide Web, many investors saw a great investment opportunity and companies emerged—in some cases traditional ones—which, with the rise of the internet and e-commerce, presented business models based on this new phenomenon. The NASDAQ index, above 4,800 points at the height of the bubble, began to suffer declines in some stocks, spreading fear among investors and thus triggering the so-called dot-com Y2K effect.
In just two years, the market lost close to five trillion dollars. The NASDAQ bottomed out in October, after falling 78% to 1,114 points. As Gorka Apodaca, Head of Advisory Services in Catalonia and the Balearic Islands at Creand Wealth Management explains, “venture capital firms floated these companies emerging from the internet boom including high sales expectations for their valuations which then failed to materialise, leading to a mass exodus of these companies and the bankruptcy of many of them”.
- Financial Crisis 
The global economy was growing at a good pace in 2008, and there was nothing to foreshadow the stock market falls of close to 54% that lasted 17 months. This crisis spread across the globe, although its origins lie in the American mortgage market, which is why it is also referred to as the subprime mortgage crisis. Before the crisis erupted, banks were offering extreme credit facilities to finance the purchase of mortgages for consumers who could not afford them (hence subprime). This, coupled with the financial deregulation carried out in the US in the years prior, allowed these camouflaged subprime mortgages to be marketed, resulting in a liquidity crisis that triggered a stock market panic and a deep recession.
- COVID-19 Crisis 
The global pandemic caused by COVID-19 is another example of a Black Swan. It swept the world in 2020, leading to global lockdowns and closures, and its consequences, in terms of both human and economic loss, were devastating. In just two months, the markets fell 40%. Two of the five biggest stock market falls in history were suffered almost consecutively during the early days of the health crisis, on 12/03/20 (-9.9%) and 16/03/20 (-12.9%). The consequences of this global crisis have been the most significant since the Second World War.
- Black Monday 
We are 36 years on from the Black Swan event that triggered one of the biggest market crashes of the last century. On 19 October 1987, the US Dow Jones index plunged 22.6% in a single session, annihilating almost a quarter of its market capitalisation. Gorka Apodaca explains that “such a sharp correction was down to overvalued assets, rising oil prices and high inflation, leading to massive selling by retail and institutional investors”. The falls that followed in the subsequent days were not as steep. Peak cumulative declines of 28% after three months were recorded. The Dow Jones index even ended 1987 in positive territory (2.26%).
- War in Ukraine 
Despite the political tensions and annexation of the Crimea region a few years earlier, a full-scale military invasion by Russia was not expected. The impact on the stock market of the outbreak of a 21st-century war in the heart of Europe was not as severe as its geopolitical effect, although the market declines were as high as 18% in the seven months following the onset of the war. On the day of the invasion, the Euro Stoxx fell by 3.7%. However, the greatest direct impact has been seen in high fuel and energy costs, due to Russia’s position as a commodities exporter.
- 9/11 
Over the last century, there have also been Black Swans whose origins were far removed from the purely economic sphere, but which nonetheless had a strong impact on stock markets. Such was the case of the September 11 terrorist attacks in New York, which caused the markets to turn red, with falls of 7.1% on the day itself, and a cumulative maximum of near 17% in a month. The contagion effect also caused the main European indices to open lower, with the Euro Stoxx down by -6.6%. On the other side of the coin was the S&P 500 VIX index, which rose by 26.6%, truly living up to its name as the fear index.
- Brexit 
The unexpected result of the referendum called by the British government to vote on the country’s possible exit from the European Union caused a real earthquake in the political, social and economic spheres. The 52% support for leaving the EU triggered an initial reaction in the stock and currency markets that sent the London stock market down by more than 7% in the subsequent session, resulting in a total fall of 14% over two days. It also led to the largest devaluation of the pound ever recorded in a single day, as it fell 10% against the dollar and 7% against the euro.
One conclusion drawn from the analysis is that financial Black Swans, such as the Crash of ‘29, the dot-com crisis in 2000 and the 2008 financial crisis, had much more devastating effects on the markets compared to other events with a greater political and human impact, such as 9/11 or the outbreak of the war in Ukraine, which saw less abrupt stock market falls.
Furthermore, the effect of this type of financial event is much more long term. That is to say that stock markets declines were accumulated over a much longer period: 33 months in the case of the Crash of ‘29 and 31 months in the 2000 dot-com crisis, as opposed to two sessions of falls after Brexit and two months of declines during the COVID-19 crisis.
Although these are high-impact events that, as we can see, recur with some regularity over time, protecting ourselves from Black Swans is complicated, precisely given their unpredictable nature. The best way to be prepared for them, from an investment perspective, is through diversification and taking advice to ensure we avoid any hasty decisions at difficult times.
About Creand Wealth Management
Creand Wealth Management, the Crèdit Andorrà Group’s private banking firm, offers global management and wealth planning services to private and institutional clients, with professional management and a commitment to personalised service and open architecture.The company, with offices in Madrid, Barcelona and Valencia, has a business volume of over 3.4 billion euros.
Creand Wealth Management is the trade name of Banco Alcalá, S.A.