A “black swan” event is a metaphor used by the investment and finance community to describe an event that comes as a huge surprise and is a very unusual situation which is extremely difficult to predict. Naseem Nicholas Taleb coined this phrase, with events such as the crash of the housing market in the United States in 2008, Black Monday in 2015 which saw a significant fall in the Chinese stock market, the events of 9/11 etc. as a few examples of Black Swan events. The latest hype around the world that has everyone talking about is the American presidential election. With the elections being less than a month away, investors and experts are saying that this can be one of the major black swan events that can shock the world in many different ways.

“Investors are expected to be on their toes as the year progresses with Citi suggesting an unexpected outcome to a widely anticipated event – like the election – could cause a significant and potentially lasting repricing of assets on both a domestic and global level,” reported CNBC. But, what can possibly go so wrong that it comes close to being called as one of the worst black swan events? Is it the threat that Trump brings along with his rigid, stubborn and unfriendly behavior or is it Clinton’s liberal views? If analysts were to be believed, the American presidential elections have the potential to cause considerable volatility and will re-price a major number of markets across the globe. With Brexit already hitting the market and making significant changes in June, the elections now bring a considerable threat not just to America but all over the world.

 

Why do we consider it to be a black swan event?

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The idea of presidential elections being a black swan event have already started occurring in the minds of analysts and investors to which media has been successful in providing sustainable evidence. The polls have suggested that Hillary Clinton has a huge majority over Donald Trump, but UK bookmakers suggest that Trump will be making the final swoop. “Citi has maintained its 65 percent probability of a Clinton presidency, but is not being overly complacent, saying that polls and the betting markets have been volatile like that seen during the U.K. referendum on its EU membership,” said CNBC in their report regarding the elections. This is what is getting people confused. There are a lot of underlying sentiments that appear to be firmly established which in turn is a recipe to shock for market pricing.

There are a lot of questions that run within the minds of people regarding who will win and how much influence the President will really have. What about the upcoming policies and policy makers? How will the U.S. move towards global trade, global economic growth and frame it’s international policies? After controversial statements from Trump, all these questions and their possibilities have been taken way too seriously especially in countries surrounding America as well as countries like India, China and Singapore where trade has been at an all time high in the past couple of years, turning Asia into a top financial hub. All these answers come with great uncertainty and that translates into the risk that one wouldn’t want to take in the market. “There are a number of downside risks to the global economic outlook, the most immediate being associated with the US presidential election in November,” Moody’s analysts led by Madhavi Bokil said in the note.

 

The huge factor of UNCERTAINTY

Most of the polls back Hillary Clinton to be the next President, so if Trump were to win, uncertainty could alone hit the economy very hard which would have an impact on global growth leading to financial conditions in the U.S. getting even tighter. The Federal funds rate has been below 1% since the 2008 housing crash and if financial conditions were to get worse, it can be hard to imagine what an event that would turn out to be. 15 months ago, Donald Trump as just a nominee sounded like the best joke, but that nominee is today the Republican candidate; if this isn’t a black swan event in itself, it’s hard to predict what is.

Were things always the same? This could be a hard question to answer. Citi published a chart which shows non-negligible risk of election induced spike in uncertainty:

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Citi’s list of potential Black Swans (post elections):

  1. Material economic and social policy changes; a Constitutional crisis over the division of Federal Government process
  2. The next President remains subject to record-high negative ratings and low trust ratings amongst voters.
  3. Increased domestic polarization, and less support for the merits of free trade, globalization, and international engagement.

Source: Citi Research

Future Outlook

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If there is something we are sure of, it’s that either Trump or Clinton is going to be the next President and in such circumstances, it’d be good to discuss what the future holds in case either of their policies were to be implemented.

To start with Trump, his harsh words on Mexicans, Muslims and Asian immigrants can’t be overlooked which clearly shows his plans of making stronger, more discriminatory immigration policy, whereas Hillary has more liberal views on the same. With Trump coming into office, the bigger question is how badly will trade policy be affected between the countries he has attacked and accused? Looking at Trump’s trade and immigration policies, a recession could be expected sooner with trade wars bringing down America’s GDP drastically. On the other hand, Clinton’s liberal views might not see any downfalls, but the growth of United States overall will also not be on a high. There may be a slight growth or a mid-level lift, but that’s all we can expect. And with none of the policies being strong enough, the bigger question that arises again is that will there be a change in policy stance? Because if there is, “it could contribute to a weakening of the current global trade and security architecture that could have a very negative impact on global confidence and growth,” reported Moody’s analysts in their report.

With a tense situation surrounding Russia and China already, America could not only lose it’s tag of being the superpower under the new President, but also face detrimental relationships with many of its allies looking at the trade and immigration situation it has put itself into. With the election in it’s final stage, there are people who would say that Trump is riding the Black Swan but many wouldn’t deny to agree that if Trump is the Black Swan, Hillary is the grey one.

Will the upcoming event be America’s worst crisis  to-date affecting not only them but the entire globe? Only time will tell.

Disclaimer: The article is written by Yash Shah and expresses the writer’s own opinions.