A black swan event is a rare occurrence that could not be predicted and has a catastrophic impact.
Right now, you're probably seeing the term in a lot of headlines that mention the coronavirus outbreak and its role in the current stock market crash.
It's easy to see why the media would draw upon this shorthand.
Concern about the rapid spread of the coronavirus and what it will do to the global economy put a stake through Wall Street's 11-year bull market - and did it in the brief span of four weeks.
The term "black swan" to describe such events is fairly recent. Economist Nassim Nicholas Taleb coined the term in 2001.
Certainly, no one was prepared for how dramatically COVID-19 would change human behavior, first in the Wuhan area of China, where it started, and more recently in parts of Europe and the United States.
As more people stay home and spend less money, businesses suffer and profits drop. And the longer the crisis goes on, the greater the odds of a recession.
The huge one-day losses amid extreme volatility in the markets over the past month - the S&P 500 has fallen as much as 29% from its Feb. 19 peak - is typical for a black swan event. A global event of this severity was definitely not on Wall Street's radar in January.
Some sticklers have claimed that the coronavirus crisis is not a true black swan event because the likelihood of a global pandemic had been predicted by some health experts. Instead, they say this is a "grey rhino" event. That describes a highly probable but nevertheless ignored threat that has a big impact.
The spread of COVID-19 may well be a grey rhino, but most people will keep calling it a black swan.
To get an idea of what the coronavirus crisis will mean for investors going forward, we need to look at the long-term impact of a black swan event from the past...
What the World War II Black Swan Event Tells Us
One black swan event from the past that is particularly useful in shedding light on the reaction to the coronavirus crisis is the World War II bear market. Not only was the outbreak of war a shock to many, but the widespread impact and ongoing uncertainty from the war in many ways parallels the coronavirus crisis.
While tensions had been running high in Europe, many believed that Nazi Germany would be content with the annexation of Austria and the Czech territory of Sudetenland.
So the German invasion of Poland in September 1939 came as a surprise. But at first, traders thought the war would not affect the United States and could even be a profit opportunity for American business.
Likewise, U.S. stocks kept rumbling higher even as the news out of China grew ever more troubling. The Dow Jones Industrial Average hit an all-time high of 29,568.57 on Feb. 12 after several weeks of ominous reports.
Two weeks after the invasion of Poland, the Dow peaked at 155 points.
Then, in May 1940, Germany invaded the Low Countries and France. Just as when cases of the coronavirus began showing up in Europe and America, the war suddenly seemed much more threatening. In eight days, the Dow plunged 23%.
The markets bounced around for the next year or so until the Japanese attack on Pearl Harbor. That attack, and the weeks of Allied losses in the Pacific that followed, made Wall Street realize just how grim the situation was. The Dow hit a bottom of 92 in April 1942 - a drop of 40.6% from its level at the war's start.
Unfortunately, it's still too early in the coronavirus crisis to predict when it will be over and how much economic damage it will inflict. Like World War II, the coronavirus crisis could continue to stir uncertainty and fear for months to come, with each new revelation pushing stock prices lower.
But it's not all gloom. The markets reversed course in mid-1942 - three full years before the end of the war. The trigger was the encouraging news of the Doolittle Raid on Tokyo in April. In the months that followed, the Allies had a string of major victories (Midway, El Alamein, Stalingrad) that kept pushing stocks higher.
By the end of 1942, the Dow had recovered to 119, rising more than 29% from the low.
That suggests today's markets won't stay in a funk for as long as we're fighting the coronavirus. As soon as we start getting good news (approval of a vaccine, a steady decline in the rate of new cases), stocks will rebound.
In the meantime, we're stuck with the fear and uncertainty. Here's what investors can do while waiting for better days...
An Investing Strategy for a Coronavirus Market
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Money Morning Chief Investment Strategist Keith Fitz-Gerald says investors need to resist their worst instincts as the markets gyrate - which may go on for some time.
"The coronavirus situation is going to be with us for a while, which is why you want to take a longer-term perspective rather than fall prey to the short-term narrative dominating headlines," he said.
Don't just rush in to "buy the dip," Fitz-Gerald said. Instead, he suggests people stay disciplined and make clear-headed buying choices.
"Amateurs are trying to buy stocks just because they're down, not realizing that they can go down further," he said. "But savvy investors are buying stocks that go down the least and roar back the fastest. You want to buy the world's best companies because they're the ones with (1) a clear path to profits and (2) the ability to protect margins in the face of challenging economic conditions."
Fitz-Gerald also advises against selling out of fear. If you have good reasons for holding a stock, you shouldn't be selling unless those reasons have changed. Eventually this will pass, and stocks will start going up.
"The average investor doesn't understand half of what they're missing if they sell out now simply because they're scared or uncertain," he said. "The profit potential is simply unprecedented, especially if you can pick up shares when the rest of the market is scared silly."
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.