The next market selloff could be triggered by something we're not discussing right now
There seems to be no shortage of events on the calendar that threaten to derail the global economy and financial markets.
There’s the US presidential election, which includes a candidate who has promised his constituents to turn the American political system upside down. There’s the prospect of the Federal Reserve hiking interest rates for the first time since December. There’s the upcoming earnings season, during which US companies are expected to report declining profits.
“Beyond Clinton vs. Trump, the elections in Germany, France, the Netherlands, and probably Spain, as well as the Italian constitutional referendum and British withdrawal from the European Union, could also create volatility,” Goldman Sachs’ Jan Hatzius said. “Beyond politics, there are two economic risks that have been with us for some time, namely a sharper-than-expected credit adjustment in China and the structural design flaws in the euro area.”
Are we missing anything?
Unknown unknowns
HSBC’s Ben Laidler looked back at recent sell-offs in the stock market and identified the news events that may have triggered those moves.
“Our analysis of the eight pullbacks seen in this bull market show little consistency in causality,” Laidler said. “However, if a pullback comes, it will likely be caused by something we are not discussing right now.”
That’s a scary statement, but an important one for investors who are assessing the risks to which they are exposed. It echoes a memorable quote from former US Defense Secretary Donald Rumsfeld: “As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”
In its new Guide to the Markets, JP Morgan Asset Management includes an annotated chart of the S&P 500 (^GSPC) and the CBOE Volatility Index (^VIX), which highlights the news surrounding recent pullbacks in stock prices.
Certainly, no one predicted the flash crash of 2010, the BP oil spill or the outbreak of Ebola.
And so, Laidler’s expectation for the next selloff to be triggered by some unknown unknown isn’t crazy. If you’re not sold, consider some more recent events.
Wells Fargo and Deutsche Bank have dominated headlines in the financial markets in recent weeks. Wells paid $185 million in fines and fired 5,300 employees for fraudulently opening around 2 million unwanted accounts. Deutsche Bank has seen its shares plummet amid concerns about the health of its balance sheet in the wake of a $14 billion fine from the US Department of Justice.
What do these two stories have in common? Beyond being big banks, they both represent massive stories that very few were worried about just a month ago.
And such is the nature of risk in the markets. It’s always something, and it’s almost impossible to see it coming.
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Sam Ro is managing editor at Yahoo Finance.
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