Investors are looking for 2008-like 'black swans' that just aren't out there

Black swan herdingChina Photos/Getty ImagesHerding black swans at a fair in China.

Things aren’t looking great in the stock market.

Not only is the S&P 500 having its worst ever start to the year, but stocks dove Wednesday with the Dow Jones Industrial Average collapsing by as much as 500 points.

There are fears among some bears that investors are in fora global recession and possibly another 2008-like crash. This has plunged investor sentiment to extremely low levels.

But the fears are overblown, say JP Morgan Funds Global Market Strategist James Liu. This isn’t a repeat of the Great Recession.

“2000 and 2008 taught people to look for Black Swan events, and there simply aren’t any out there,” Liu told Business Insider.

A Black Swan is an event that is rare and virtually unpredictable, and it can cause a sudden catastrophe. The concept was popularised in Nassim Taleb’s book “The Black Swan: The Impact of the High Improbable“. Typically investors associate a Black Swan event with stock market carnage.

According to Liu, the unpredictable nature of the 2000 tech bubble and the 2008 global financial crisis has put market watchers in a defensive position, constantly looking for these Black Swans that will spell the next financial doom.

“Investors, and a lot of commentators on TV, are trying to time the next big event or the next downturn,” said Liu. “We just don’t think it’s the right time or something like that is going to happen.”

On a technical level, a Black Swan is something that no one sees coming, so by the very definition you can’t predict it. But, on a colloquial level (such as Societe Generale uses in its quarterly list), Liu still doesn’t see anything that could suddenly pull the world into a recession.

“Commentators bring out this list of reasons to be bearish, but there’s nothing original on that list,” said Liu.

The decline in oil, China’s economic slowdown, a possible manufacturing recession, and the decline in corporate earnings have all been cited as reasons to worry about the possibility of a larger recession. According to Liu, all of these are a known quantity and none of them will drag the entire global economy down.

The fundamentals of stock valuations and the underlying economic trends of employment and consumer incomes should make the current market attractive for buyers, said Liu.

While Liu wouldn’t put a timeline on a possible rebound, he did think that the market is near the bottom in terms of sentiment.

“According to the American Association of Individual Investors, 18% of investors are saying they’re bullish,” Liu told us. “This is the lowest since 2005, and before that 1992. We’re close to the bottom now if you look at sentiment, this would point to people coming back soon.”

Based on Liu’s analysis, it seems as long as investors think the next 2008 is right around the corner, the market is going down. When investors finally realise (most likely soon) that the economy is still strong, then the market should start on its way back up.

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