Gray Swans and Black Swans

By Monday’s close, the S&P 500 Index was closing in on the low established in the August swoon – such a retest was essentially our minimum expectation, as V-shaped rebounds are very rare. The question is now whether it will only be a retest, or if something worse is in the offing. No-one knows for sure of course, but we’ll briefly discuss what we are looking at in this context.

Image via NYTimes

It is interesting that as the market has declined in recent days, the news-flow accompanying this move has steadily worsened. This is fairly typical for downward trends: suddenly the frequency of bad news increases, and more importantly, suddenly bad news seem to matter. Not only have economic data releases generally been weak regardless of their provenance (yesterday: China’s manufacturing PMI, Dallas manufacturing survey), but assorted black swans, or at least “gray” swans are suddenly popping up left and right.

The SPX is approaching lateral support – click to enlarge.

An example for a recent “black swan” is the emissions scandal surrounding Volkswagen (VW). We don’t want to discuss the merits of this case at this juncture (we will soon have more to say about the matter). What is important in terms of the financial markets is that VW is a pretty important company in Germany, in fact it is one of its largest employers. As such, it is important for all of Europe. VW’s woes have helped to cement the erasure of Mr. Draghi’s “QE effect” on Germany’s stock market, which was already well underway before the scandal broke.

VW share price – this certainly looks bad – click to enlarge.

Another “black swan” are the concerns that have suddenly been raised about Ms. Yellen’s health (see Mish’s discussion here), after she faltered about 50 minutes into a speech delivered at Amherst University. Ms. Yellen no doubt has to deal with a lot of stress and she is no longer a spring chicken. It may be that these were burn-out type symptoms, or perhaps the event was just a sign of short term exhaustion, which she will quickly recover from (we certainly wish her all the best). Anyway, given the general backdrop, this is something that probably worries the markets, even though no-one has publicly mentioned this aspect as far as we can tell.