3 Black Swans That Could Cause The Next Stock Market Crash

Already reeling from the expanding U.S.-China trade war, global stock markets were dealt another blow on Friday by President Trump's surprise announcement of a 5% tariff on all imports from Mexico, effective June 10, unless that country increases efforts to prevent illegal crossings of the U.S. border. Even before that news broke, Vincent Deluard, the head of global macro strategy at INTL FCStone Financial, had warned that the markets already are so destabilized that any one of three potential black swan events could spark a crash.

"It is not difficult to envision a scenario where this Twitter tantrum [by Trump on trade] turns into a fully-fledged bear market," Deluard warned in a recent note to clients, as quoted by Business Insider. In early Friday trading, the S&P 500 Index (SPX) was down 6.9% below its record high.

The table below summarizes the three potential black swan events that Deluard foresees, several of which may not be on most investors' radar screens.

Significance For Investors

Deluard's concerns about private market valuations are illustrated by the recent IPOs of Uber Technologies Inc. (UBER) and Lyft Inc. (LYFT). In early Friday trading, they had fallen as far as 12.4% and 38.4%, respectively, below their offering day highs. The disappointing performance of these highly touted IPOs suggests that private market valuations may be seriously inflated. In turn, public market valuations eventually could face severe downward pressure.

"Valuations will need to be dropped," Deluard wrote. "Capital raises will slow. Investors who financed rounds at absurd multiples will need to write down their stakes," he added.

The second potential black swan is two of world's largest oil producers, Iran and Venezuela, which exert a huge influence on global petroleum prices. Iran faces political turmoil and international sanctions, with President Trump looking to ratchet them upwards. Venezuela also is gripped by political turmoil, accompanied by a general economic collapse. If supplies from either or both of these nations plummet, that could send oil prices soaring to destabilizing levels.

The third threat could come from far-left U.S. Democrats demanding expanded health care and other reforms, according to Deluard. "The demographic turning from boomers to millennials and Gen Z will lead to greater demand for redistributionist and inflationary policies in the 2020 election," Deluard observes, and this has led to a heavy leftward tilt among U.S. Democratic Party candidates. Many contenders are proposing redistribution through higher taxes, a massive expansion of government health care, and anti-corporate measures such as the restriction or banning of stock buybacks,.

Looking Ahead

In addition to Deluard, several investing gurus forecast - even without black swan events - that stocks already are poised to fall 20% or more due to the U.S.-China trade war, slowing corporate profits and the decelerating global economy. Bank of America warns that continued trade tensions could cause stocks to fall as much as 30%. Yet others are warning that a dangerous corporate debt bubble also poses a massive threat to the bond and stock markets alike, as well as the economy.