Guesstimating the Markets {Part V-The Unexpected Event}

Today I'll share with you the last scenario that I think could happen during the rest of 2012. I'll offer this with the same caveats as in the earlier posts: 

1. These scenarios are based on what we know today. An unexpected event could throw this whole exercise down the drain.

2. Markets will become slaves to the election in November the closer we get to that event.

3. Do not go trade or invest based on what you see here! Remember the consigliere's maxim, "markets will do what they have to do to prove the most amount of people wrong"!

4. Treat these scenarios as generalities. I have no way of knowing whether the end points will play out the way I am envisioning here and offer these up as a start point for more specific analysis. As an example just because in the chart above we show stocks topping out in May or June does not mean even if we are right on direction we'll get it correct on time.

Scenario #4:

An unexpected catastrophic event occurs that catches investors off guard in terms of their allocations to stocks.  This could be a geopolitical event {war with Iran for example}, natural {earthquake or hurricane} or economic {a country like Spain or Italy for example defaults on its debt}.  Markets in essence crash before at some point finding equilibrium.  The fallout from this event would likely carry over into 2013.  Depending on the type of event the President's chances of getting re-elected could fall to under 40%.

This is in some ways the hardest scenario to handicap.  Nations sometimes behave irrationally and terrorists don't care about market timetables.  From a geopolitical standpoint the NATO Summit in our Chicago this spring and the Olympics later this year could prove to be irresistible targets.  Natural disasters could occur tomorrow or five years from now.  We assume that on an economic front that the European countries with the most debt will behave rationally but all politics is local and harsh economic environment sometimes make politically extreme policies look attractive.  As such I'll assign a probability factor of 5-15% to this scenario.  If I had to guess, I'd say that the most likely way for this scenario to occur would be a natural disaster.  Waking up some morning to find Los Angeles or San Francisco flattened by an earthquake could easily derail the economy and throw the markets into a tailspin.  But again those things may not happen this year or even in the next 10 years. 

*Long ETFs related to the S&P 500 in client and personal accounts.