The Black Swan Election Scenario for Stocks


The micro view: Aircraft manufacturer Boeing (NYS: BA) was one of the Dow's top performers today, gaining 2.3%. This may have had something to do with the announcement that the company completed an order for 60 jets with Aeromexico with rights for an additional 30 aircraft. The firm order alone is valued at more than $6 billion, based on list prices. Is that enough of a reason to buy the stock now? Click here to receive the Fool's comprehensive assessment of Boeing shares, along with a full year of updates.

The macro view: Sometimes I think the market's sole function is to make people whose job it is to write about the market look like small-"f" fools. Who would have thought that the day of the election would witness one of the largest moves in the second half of this year? The Dow Jones Industrial Average (INDEX: ^DJI) and the broader S&P 500 (INDEX: ^GSPC) rose 0.8% and 1%, respectively, today. Hang on, I hear you say -- those aren't big moves. And you'd be right. Nonetheless, if we take the Dow, today's 1-percentage-point increase is in the top decile of daily positive gains since July 2€ -- which just shows that volatility has been nowhere to be seen during that period.

Speaking of volatility, there is a possible nightmare scenario for this election in terms of stock market impact. Imagine if it were to take more than one month to decide the outcome of the election -- as it did in 2000. Against the backdrop of the looming fiscal cliff (the decline in economic activity that will result if automatic tax increases and spending cuts kick in early next year), that would be likely to prove extremely damaging to investor confidence. Under such circumstances, I can easily picture the stock market declining 10% or more. How would you react if that occurred? Let me be clear: This is a low-probability outcome; if I had to guess, I'd say the odds are not even one in a hundred. Still, it can be fun and instructional to think through just such outcomes beforehand.

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Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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