What Are Exogenous Events?
Since we are in the world of Artificial Intelligence (AI), I thought that I would take Microsoft’s (MSFT) Copilot out for a test drive. I asked – What is an Exogenous Event? Here is the response:
An exogenous event is something that occurs outside a system and cannot be influenced or controlled by the participants within that system—but it does affect the system’s outcomes.
In plain terms
- Exogenous = external cause.
- The event comes from outside the model, outside the economy, or outside the organization being analyzed.
Examples
- Economics: A natural disaster, geopolitical shock, or sudden regulatory change affecting markets.
- Finance: A surprise interest rate decision by a central bank, an unexpected war, or a global pandemic.
- Business: A new government mandate or a change in consumer behavior caused by outside cultural shifts.
Why it matters?
Exogenous events are important because they:
- Can’t be predicted using data inside the system.
- Often cause significant volatility or structural changes.
- Force analysts, investors, or policymakers to adjust models or expectations.
By the way, MSFT stock is breaking down and is approaching prices we have not seen since 2023. I sold all positions in all accounts and strategies.
How Do Investors React to Exogenous Events?
To begin with, such events are unpredictable, so trying to prepare for an exogenous event is a fool’s errand. Was anyone prepared for the attack on Pearl Harbor on December 7, 1941? How about the oil embargo in the 4th quarter of 1973 and 1st quarter of 1974? The Russian Coup? The 9/11 attacks? Hurricanes Katrina and Wilma? The COVID pandemic? And now the “Epic Fury” attacks on Iran? If you say that you predicted them, did you predict the exact day, time and location? I doubt it. Even the Nostradamus Prophecies are open ended and are explained retroactively.
So, really the way we react to exogenous events is first and foremost, not to panic. Then you may want to raise above average cash levels and wait for the market reaction to play itself out. I’ve done so. Also look for short-term trading opportunities. Once the market turns higher, you can revert to investing in longer term opportunities.
During the COVID pandemic, with people staying at home, stocks like Zoom (ZM), Peloton (PTON) and Docusign (DOCU) were excellent trading opportunities. All good trading opportunities come to an end as they did for ZM, PTON and DOCU by the end of 2021.
What happens after a War?
There is a significant amount of data which points to how stocks react to wars in the long term – 3-month, 6-month and 12-months - after the initial event occurs. So, just hang tight. I expect that Epic Fury will conclude in the next few weeks. Maybe we head lower until then if technicals break down. Maybe we had a washout this week. Nobody will ring a bell when we hit a bottom but here is what typically happens (in no particular order):
- Volatility will spike and then reverse. We are not quite there yet but are getting close.
- Corporations will begin to buy back stocks in large sizes.
- Cash gets put to work by institutions when valuations get stretched to the downside. Rest assured, there is plenty of cash on the sidelines.
- Short sellers will cover once it is apparent that the downside is converting to an upside bias. They usually come in later in the upturn.
- Retail investors, usually the last to come back, will jump back into the market.
Techs Correct but Don’t Forget Dividend Stocks
Large cap stocks, particularly in the technology sector, have felt the brunt of the recent sell-off. You can say that they are in a correction. Corrections are natural, normal and healthy in the financial markets. Embrace them and don’t fear them. A bottom will occur and in the long run you will forget all about the Correction of 2026.
While our Growth Portfolio has retreated a little, our Dividend Portfolio is in the green. In fact, if you had a 50/50 Growth/Dividend Balanced Portfolio, you might be flat to slightly positive. I have hammered this home with my clients and my readers for years. Don’t Forget Dividend Stocks because as the old saying goes: When the Going Gets Tough the Tough Get Going.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC did not hold any positions mentioned - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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