These sort of major disruptive market events, driven by market mechanics or liquidity rather than market fundamentals entirely, are not unheard of. An unwinding of a Japanese carry trade is one instance of these kind of occurrences. Some notable other recent incidents are summarised below.

2022 Gilt Crisis: In September 2022, The UK government announced a "mini-budget" including £45 billion in unfunded tax cuts. This raised concerns about fiscal sustainability and saw a rapid rise in UK government bond yields. The spike higher meant leveraged trades held by defined benefit pension funds generated a large increase in their collateral and margin requirements. To meet these requirements, they were forced to sell more government bonds, pushing yields even higher. In the end, the Bank of England was forced to intervene in the market, implementing a £65 billion emergency bond buying program.

2020 Negative Oil Prices: Covid lockdowns amidst continued petroleum production saw WTI oil futures prices fall to nearly negative $40 per barrel in April 2020 as inventories rose very close to capacity. Investors were being paid to essentially take storage risk. Like negative bond yields following the Financial Crisis, negative oil prices were a new phenomenon.

2018 Volmageddon: A sudden rise in market volatility in February 2018 led to a one-day loss of more than 90% in the value of short volatility exchange-traded products (ETPs). These products derived an income from selling forward volatility. When the price of expected volatility rose, this created a value destroying feedback loop. To hedge risk in a rising volatility market where their assets were falling (because they are short volatility), the product issuers needed to buy volatility (VIX) futures, pushing the price of volatility higher and exacerbating the problem.

Swiss National Bank Peg Break: In January 2015, the Swiss National Bank unexpectedly scrapped its currency peg against the Euro. Immediately after the central bank’s announcement, the Swiss Franc soared by ~30% against the Euro and Swiss equities fell around 10%.

Flash Crashes: There have been many instances of flash crashes in the past decade, often with mysterious causes:

·         In May 2022, many European markets fell 5% - 7% after a very large accidental sell order placed on market.

·         In October 2016, the British Pound fell 6% against the USD in 2 minutes, before quickly recovering most of the loss.

·         In August 2015, the S&P 500 declined 5% in minutes after the open, with little to explain the fall.

·         In October 2014, US bond yields round tripped around 1.6 percentage points, again with no discernible cause.

·         In May 2010, alleged market manipulation by a participant (rapidly executing large S&P 500 futures sell orders) drove a flash crash of around 10% in US markets.

Black Monday: Of course, the most infamous market dislocation continuous to be Black Monday. On October 19, 1987, US markets fell more than 22% in one day after algorithmic trading drove a negative feedback loop, building upon fundamental weakness already present.

History is littered with market events which in the moment feel very threatening, but in the end turn out to be a flash in the pan. More often than not, the sell-off is recovered extremely quickly (see below). That’s not to say that serious market drawdowns don’t occur – they certainly do. However, they are generally tied to fundamentals, which are more predictable than out of the blue market crashes. As a result, they are easier to position portfolios for.