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Beware the 'black swans' in the market

Investors always need to be prepared for black swans descending onto the markets during the low volume summer months. It's just a well understood notion among veteran Wall Street strategists before putting trades on after May.

That's especially the case during a Trump presidency where a single tweet could de-stabilize relationships with long-time allies. Or, as is currently the case, make a U.S. trade war with China go from bad (like now) to brutal.

If tariffs [on China] go up to 25% and there is an adjustment in the renminbi and it moves much more sharply that could be very de-stabilizing for global capital markets - that to me is a very real clear and present danger. That would trigger outflow pressures from China, de-stabilize their domestic system," cautioned Ironsides Macroeconomics managing partner Barry Knapp on Yahoo Finance's The First Trade.

Don't think Knapp is off base here in calling a potentially de-stabilizing event for markets due to yuan weakness. The Chinese yuan has plunged in value since President Donald Trump began escalating his trade war with China late last year. A fresh round of tariffs on another $300 billion in Chinese imports - per Trump's latest threats - could further hammer the yuan and to Knapp's point, trigger massive outflows of investments in the country.

In other words, probably a whole lot of selling in stocks globally.

The black swan events

Have no damn clue what a black swan event is? It's perhaps one of the simplest investing concepts around to grasp, although almost entirely impossible to accurately predict. A black swan event is one that completely surprises a particular asset class. Think along the lines of the dreaded flash crash that sent some stocks instantly to $0 or a worse-than-expected hurricane in May that could prove devastating to insurance companies (stocks, too).

Or, the aforementioned random presidential tweet at midnight that goes on to freak out CEOs and investors ahead of the opening bell. Yours truly would even characterize a fundamentally weak company beating Wall Street profit estimates one quarter by 20 cents as a black swan event - that type of positive news just wasn't expected.

Indeed, this summer is likely to have its black swan moments. Besides Knapp's yuan theory, veteran strategist Scott Clemons at Brown Brothers Harriman said beware of a surprise uptick in inflation. If inflation picks up out of the blue, the Federal Reserve may not deliver on the interest rate cuts markets have priced in and stocks could react harshly.

"I think one is well-advised to worry about the things no one else is worried about. Nobody is worried about inflation. I just can't help but to think that as wages accelerate, as the labor market continues to tighten I wonder if at some point that turns into an acceleration in prices. That's my black swan," Clemons said.

That said, happy investing this summer!
Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi