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Resilience Through Black Swan Events
A black swan event, otherwise known as the “black swan theory,” describes a rare, high-profile, hard-to-predict event that's often retrospectively rationalized as predictable. The COVID-19 pandemic is a good example: By April 2020, the U.S. gross domestic product (GDP) had fallen by 4.8% and the number of first-time unemployment filings surpassed 30 million — a situation the U.S. government had neither predicted nor prepared for. Yet by 2021, thoughts on the predictability of COVID-19 were being widely circulated.
Investor Warren Buffet is often cited as an expert in “waiting out” volatility rather than pulling out of investments that can prove to be valuable in the end. History teaches us that taking a long-view on black swan market volatility can prevent investors from making common mistakes, such as fear-based decision-making when times are tough.
With selloffs ranging from -5% to -50% during black swan events, the S&P 500 has absorbed varying levels of investor fear. Here's a look at select events over the last half-century.
Wars, Viruses, and Excessive Valuations
Israel Arab War/Oil Embargo
- Start of Sell Off/Previous Peak: Oct. 29, 1973
- Size of Sell Off: -17.1%
- Duration of Sell Off (Trading Days): 27
- Duration of Recovery (Trading Days): 1475
Iranian Hostage Crisis
- Start of Sell Off/Previous Peak: Oct. 5, 1979
- Size of Sell Off: -10.2%
- Duration of Sell Off (Trading Days): 24
- Duration of Recovery (Trading Days): 51
- Start of Sell Off/Previous Peak: Oct. 13, 1987
- Size of Sell Off: -28.5%
- Duration of Sell Off (Trading Days): 5
- Duration of Recovery (Trading Days): 398
First Gulf War
- Start of Sell Off/Previous Peak: Jan. 1, 1991
- Size of Sell Off: -5.7%
- Duration of Sell Off (Trading Days): 6
- Duration of Recovery (Trading Days): 8
- Start of Sell Off/Previous Peak: Sept. 10, 2001
- Size of Sell Off: -11.6%
- Duration of Sell Off (Trading Days): 6
- Duration of Recovery (Trading Days): 15
- Start of Sell Off/Previous Peak: Jan. 14, 2003
- Size of Sell Off: -14.1%
- Duration of Sell Off (Trading Days): 39
- Duration of Recovery (Trading Days): 40
Global Financial Crisis
- Start of Sell Off/Previous Peak: Oct. 9, 2007
- Size of Sell Off: -56.8
- Duration of Sell Off (Trading Days): 356
- Duration of Recovery (Trading Days): 1022
Intervention in Libya
- Start of Sell Off/Previous Peak: Feb. 18, 2011
- Size of Sell Off: -6.4%
- Duration of Sell Off (Trading Days): 18
- Duration of Recovery (Trading Days): 29
- Start of Sell Off/Previous Peak: June 8, 2016
- Size of Sell Off: -5.6%
- Duration of Sell Off (Trading Days): 14
- Duration of Recovery (Trading Days): 9
- Start of Sell Off/Previous Peak: Feb. 19, 2020
- Size of Sell Off: -29.5%
- Duration of Sell Off (Trading Days): 19
- Duration of Recovery (Trading Days): ongoing
*The sell-off measures from the market high to the market low.
While the declines can be severe, most have been short-lived. Markets typically returned to previous peak levels within a couple of months. The Oil Embargo, Black Monday and the Global Financial Crisis are notable outliers, with the recovery spanning a year or more.
Any investor who invests long-term will eventually face market volatility. Maintaining a patient, thoughtful outlook on your investments and future opportunities that may lie ahead may help improve the outcome of your investments.
The bottom-line is that investors are better off maintaining patience and discipline during periods of volatility, particularly because history shows us that markets eventually recover.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal.
Past performance is no guarantee of future results.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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*The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market.
The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. It is based on exchange, and it is not an index of U.S.-based companies.