Was COVID-19 A Black Swan for Markets?

The 2020 coronavirus outbreak did not only have a massive health impact, but also huge economic implications, as strict lockdown measures were implemented across the globe in order to contain its spread.

Pandemic Impact

Global Gross Domestic Product (GDP) plunged -3.3% last year, with the second quarter being the most dismal one. In the United Sates for example, economic activity (GDP) contracted 31.4% in Q2 2020 - the worst performance since WWII - and April's Jobs report (NFPs) was the worst on record, as the American economy lost a devastating 20.5 million Jobs.

Volatility in financial markets exploded and the US stock exchange hit multiple circuit breakers in March 2020, which led to numerous trade halts, while WTI Oil's May Futures contract collapsed to negative prices in April 2020.

More than a year has passed since the initial COVID-19 outbreak and as the world returns to normalcy, it is worth exploring whether it could have been predicted and perhaps even prevented.

Given this global rout and unprecedented events, the term "Black Swan" has been thrown around a lot since to describe the COVID-19 pandemic and its economic implications. However, was it really a Black Swan?

Black Swan Definition

The term was coined by Nassim Nicholas Taleb and was presented in detail in his 2007 book The Black Swan: The Impact of the Highly Improbable in order to describe the extreme impact (either positive or negative) of rare and unpredictable outlier events.

As per Mr Taleb, for an event to be considered a Black Swan, it needs to meet three criteria:

1. It needs to be outside the realm of regular expectations
2. It needs to have an extreme impact
3. Despite being an outlier, after the fact we come up with explanations that presented it as something that was actually predictable.

The spread of COVID-19 easily fits the second requirement, as it did have (and still has) severe impact on the economy, financial markets, global supply chains, on society and our overall day to day life.

However, stating that it was unpredictable seems a stretch to me, as there have historically been similar pandemics such as the 1918 influenza or the more recent outbreaks of SARS in 2003 and H1N1 is 2009.

Furthermore, intelligence reports such as the 2019 World Wide Threat Assessment of the US Intelligence Community had warned that: …the United States and the world will remain vulnerable to the next flu pandemic or large-scale outbreak of a contagious disease that could lead to massive rates of death and disability, severely affect the world economy…

Apart from such annual assessments,sources revealed that as far back as late November 2019, U.S. intelligence officials were warning that a contagion was sweeping through China's Wuhan region, changing the patterns of life and business and posing a threat to the population.

Taleb On The Pandemic

The definitive response on this topic, however, was given by Mr Taleb himself, who has argued many times that the COVID-19 outbreak was not a Black Swan, but actually the opposite. On a March 2020 post for instance, he wrote:

Had they read that book, they would have known that such a global pandemic is explicitly presented there as a white swan: something that would eventually take place with great certainty. Such acute pandemic is unavoidable, the result of the structure of the modern world; and its economic consequences would be compounded because of the increased connectivity and overoptimization.

Markets, financial institutions, lawmakers, regulators and other actors of the financial and political system tend to misinterpret such events as Black Swans, perhaps in an effort to purge themselves of their failure to foresee and avoid them.

Another common misconception exists around the 2007-2008 global financial crisis, which has also been dubbed a Black Swan by many. But once again, Mr Taleb has shot down such claims on various occasions, such as this Time interview where he stated: It is a white swan, but very few people saw it coming, I guarantee.