Grey Swans areevents that can be anticipated to a certain degree but areconsidered unlikely to occur and may have a sizable impact on thehealth of the overall financial markets if they do happen. (Photo:Shutterstock)

In my post, “When Black Swans Appear in FinancialMarkets,” in October of 2017, I characterized BlackSwan events as typically random and unexpectedoccurrences that  can have catastrophic effectson financial markets.

Recent examples of Black Swans in the United States included the2008 financial crisis and housing market crash; the 2001 dot.combubble, and the Long Term Capital Management collapse in 1998.

While Black Swans have occurred periodically, some events whichare not true Black Swans can still create a significant impact onthe stability of financial markets. These occurrences are knownas “Grey Swans.”

Grey Swans are events that can be anticipated to acertain degree, but are considered unlikely to occur and may have asizable impact on the health of the overall financial markets ifthey do happen.

The question then becomes: Can a series of Grey Swans morph intoa Black Swan? Are Grey Swans independent of each other, or do theypartly offset each other?

Below are several cases where Grey Swans may appear in the nearfuture:

Brexit: While the eventual exit of the UK fromthe EU was approved by referendum in 2016, the terms of theultimate departure remain uncertain given political and economichurdles. In this case, a Grey Swan would be a “hard” exit, withoutany agreement between the UK and EU, or a Brexit re-vote by theBritish public.

Tariffs: The current US administration hasembarked on a platform of protectionism and renegotiation of UStrade agreements with other countries, in particular targetingChina, Europe and Mexico. The ongoing nature of thesetariff wars and rhetoric have created a Grey Swan risk to theglobal economy, increasing the probability of higher prices and aglobal slowdown or recession.

Oil prices: Only this past October, oil was $76per barrel. At the end of December, oil had declined to $45 perbarrel, a 41% decline. While lower fuel prices are a positive forconsumers, low energy prices can be indicative of a global slowdownand have adversely affected securities issued by energy companies.A Grey Swan would likely appear if oil prices collapsed furtherinto the $30s or $20s per barrel.

Federal Reserve and interest rates. The Fed hasbased its structure and policies on independence from the presidentand executive branch. However, recent presidential criticism of theFed regarding interest rate hikes has rattled the financialmarkets. A Grey Swan could result from a standoff between theexecutive branch and the Fed, creating potential uncertainty andvolatility in the financial markets.

Whether Grey Swans will add up to Black Swans remains to beseen. There is also the possibility that certain Grey Swans canprovide positive effects over the longer term.

In any event, protection against Grey Swans is similar to thatagainst Black Swans: diversifying one's portfolio; not relying onone single market indicator for investment decisions; and limitingor avoiding “market timing”, whereby one is in or out of the marketfrequently based on a bullish or bearish outlook.

NOTE: Information presented herein is for discussion andillustrative purposes only and is not a recommendation or an offeror solicitation to buy or sell any securities. Past performance isnot a guarantee of future investment results.

Frederic Slade has over 25 years of experiencein the investment management and retirement services industries. Heis Senior Director, Investments for Pentegra RetirementServices, a leading provider of retirement services tofinancial institutions and organizations nationwide, founded by theFederal Home Loan Bank System in 1943. Mr. Slade manages over $1billion in internal bond portfolios and provides analytics andstrategy for Pentegra's Defined Benefit and Defined ContributionPlans. Mr. Slade holds a Ph.D. in Economics from University ofPennsylvania and a CFA, and has presented at a number of seminarsand conferences.