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Markets in a Minute

Black Swan Events: Short-term Crisis, Long-term Opportunity

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This Markets in a Minute chart is available as a poster.

Black Swan Events COViD-19

black swan events

This Markets in a Minute chart is available as a poster.

Black Swans: Short-term Crisis, Long-term Opportunity

Few investors could have predicted that a viral outbreak would end the longest-running bull market in U.S. history. Now, the COVID-19 pandemic has pushed stocks far into bear market territory. From its peak on February 19th, the S&P 500 has fallen almost 30%.

While this volatility can cause investors to panic, it’s helpful to keep a long-term perspective. Black swan events, which are defined as rare and unexpected events with severe consequences, have come and gone throughout history. In today’s Markets in a Minute chart from New York Life Investments, we explore the sell-off size and recovery length for some of these events.

Wars, Viruses, and Excessive Valuations

With sell-offs ranging from -5% to -50%, black swan events have all impacted the S&P 500 differently. Here’s a look at select events over the last half-century:

EventStart of Sell-off/Previous PeakSize of Sell-offDuration of Sell-off (Trading Days)Duration of Recovery (Trading Days)
Israel Arab War/Oil EmbargoOctober 29, 1973-17.1%271475
Iranian Hostage CrisisOctober 5, 1979-10.2%2451
Black MondayOctober 13, 1987-28.5%5398
First Gulf WarJanuary 1, 1991-5.7%68
9/11 AttacksSeptember 10, 2001-11.6%615
SARSJanuary 14, 2003-14.1%3940
Global Financial CrisisOctober 9, 2007-56.8%3561022
Intervention in LibyaFebruary 18, 2011-6.4%1829
Brexit VoteJune 8, 2016-5.6%149
COVID-19*February 19, 2020-29.5%19N/A (ongoing)

* Figure as of market close on March 18, 2020. The sell-off measures from the market high to the market low.

While the declines can be severe, most have been short-lived. Markets typically returned to previous peak levels in no more than a couple of months. The Oil Embargo, Black Monday, and the Global Financial Crisis are notable outliers, with the recovery spanning a year or more.

After Black Monday, the Federal Reserve reaffirmed its readiness to provide liquidity, and the market recovered in about 400 trading days. Both the 1973 Oil Embargo and 2007 Global Financial Crisis led to U.S. recessions, lengthening the recovery over multiple years.

COVID-19: How Long Will it Last?

It’s difficult to predict how long COVID-19 will impact markets, as its societal and financial disruption is unprecedented. In fact, the S&P 500 reached a bear market in just 16 days, the fastest time period on record.

black swan events

Some Wall Street strategists believe that the market will only begin to recover when COVID-19’s daily infection rate peaks. In the meantime, governments have begun announcing rate cuts and fiscal stimulus in order to help stabilize the economy.

Considering the high levels of uncertainty, what should investors do?

Buy on Fear, Sell on Greed?

Legendary investor Warren Buffet is a big proponent of this strategy. When others are greedy—typically when prices are boiling over—assets may be overpriced. On the flipside, there may be good buying opportunities when others are fearful.

Most importantly, investors need to remain disciplined with their investment process throughout the volatility. History has shown that markets will eventually recover, and may reward patient investors.

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Markets in a Minute

Which ESG Risks Are Affecting Your Portfolio?

It’s important for investors to identify which sustainability issues they’re most exposed to. Find out more in this breakdown of ESG risk by industry.

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Visualizing ESG Risk by Industry

Aging populations, climate change, and data security are some of the world’s most pressing issues, but what theme do they all share? For investors, the answer is certain: sustainability.

Sustainability is a concept that’s quickly moved into the mainstream, and is best described as the consideration of environmental, social, and governance (ESG) factors when analyzing companies. Combining these non-financial metrics with traditional analysis has been proven to have a positive influence on long-term returns.

In this Markets in a Minute chart from New York Life Investments, we’ve mapped the ESG risk profiles of four prominent industries to gain a better understanding of the sustainability issues they’re likely facing.

Fossil Fuels

Investors in this sector have substantial exposure to all three ESG risks, with environmental issues being the most significant.

RiskImportanceIssues to Consider

Environmental

High
  • The global transition to green energy
  • Stricter environmental regulations
  • Harm from spills and other accidents

Social

Medium
  • Strained community relations
  • Shifting consumer attitudes

Governance

Medium
  • Shareholder transparency
  • Risk management structure

The global transition to renewable energy paints a complex future for the sector, though it’s uncertain when oil demand will peak—predictions range from 2025 all the way to 2040. Nevertheless, market participants are taking action. To date, over 1,200 institutional investors representing $14 trillion in assets have made commitments to divest from fossil fuels.

Social risks are another source of uncertainty, especially as public awareness around climate change increases. A planned expansion of the Keystone Pipeline System, referred to as Keystone XL, has faced nearly a decade of public resistance and currently remains blocked by the U.S. Supreme Court.

Last but not least are governance risks. With many investors considering the switch to a fossil fuel-free portfolio, shareholder transparency will be of utmost importance. The onus will be on company management to demonstrate that they have a clear understanding of the risks and opportunities ahead. Royal Dutch Shell, the world’s fourth largest oil company, has made progress on this front by announcing its strategy for achieving net-zero emissions by 2050.

Financials

Social and governance risks are the top priorities for investors in the financial sector. Firms that finance the fossil fuel industry may have indirect exposure to environmental risks.

RiskImportanceIssues to Consider

Environmental

Low
  • Indirect exposure to the fossil fuel industry

Social

Medium
  • Aggressive or deceptive selling practices
  • Client relations


Governance

Medium
  • Corporate governance
  • Executive compensation

Underpinning the strength of the financial sector is consumer trust and client service. By using aggressive or deceptive selling practices, firms risk severe reputational damage and even financial penalties. Wells Fargo, America’s fourth largest bank, was recently fined $3 billion for its account fraud scandal that emerged in 2016.

These issues are closely related to governance risks, where weak internal structures can allow fraudulent activities like money laundering to take place. In fact, over a 15 month period ending in 2019, global banks were fined $10 billion for engaging in the activity. Experts believe that 60% of laundering fines resulted from criminals slipping past screening systems.

Healthcare

Social risks are the top concern for healthcare investors, given the sector’s important role in public health and well-being.

RiskImportanceIssues to Consider

Environmental

Low
  • Chemical activities

Social

Medium
  • Product safety and recalls
  • Inappropriate or misleading marketing

Governance

Low
  • Patient privacy

Unsafe products are one the most clear-cut issues because they directly harm society and shareholders. Johnson & Johnson, one of the world’s largest healthcare companies, has faced thousands of lawsuits for failing to warn consumers about asbestos in its baby powder products. The company was recently ordered to pay $2.1 billion in damages by a Missouri appeals court.

The use of inappropriate advertising is another issue that investors may want to watch out for. In 2019, Mundipharma was fined by the Australian government for making inaccurate statements in its marketing materials for opioids.

Software & IT Services

Companies in this sector are exposed to various social and governance risks, but are not known to be large polluters.

RiskImportanceIssues to Consider

Environmental

Low
  • Operation of data centers

Social

High
  • User privacy
  • Data security

Governance

Medium
  • Shareholder structure
  • Antitrust disputes

Many firms in this industry collect and monetize user data, exposing their shareholders to data privacy and security risks. Facebook has been at the center of numerous controversies in recent years, including the Cambridge Analytica scandal, which saw the unconsented collection of personal data from 87 million users. Polls found that 44% of Facebook users viewed the platform more negatively after the scandal.

These risks are likely to be amplified as governments take a firmer stance on data regulation. In 2018, the EU implemented its General Data Protection Regulation (GDPR), one of the world’s toughest privacy and security laws. In certain cases, noncompliance with the GDPR can result in fines equal to 4% of a company’s global revenues.

Navigating an Uncertain Future

Global sustainability issues are creating a more challenging environment for businesses in all types of industries. To hedge these risks, investors are turning to ESG in massive numbers—the value of sustainably managed assets now sits at $40.5 trillion, nearly double the amount from four years ago.

It’s important to remember, however, that businesses are unique. A social issue affecting one industry may not be as relevant for another. When armed with this knowledge, investors will be able to make more informed decisions that strengthen the long-term resiliency of their portfolios.

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Markets in a Minute

U.S. Dollar Performance After U.S. Elections

How much influence do elections have? We show U.S dollar performance after U.S. elections to illustrate there’s no clear trend between the two.

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U.S. Dollar Performance After U.S. Elections

News outlets often draw correlations between U.S. elections and market performance. In turn, some investors opt for more conservative portfolios until the election uncertainty is overcome. But how much influence do elections really have?

In this Markets in a Minute from New York Life Investments, we show U.S. dollar performance after U.S. elections to illustrate that there is no clear trend between the two.

What is the U.S. Dollar Index?

To start, we used the U.S. Dollar Index to track performance, which measures the U.S. dollar relative to a basket of six currencies.

CurrencyWeight
Euro57.6%
Japanese Yen13.6%
British Pound11.9%
Canadian Dollar9.1%
Swedish Krina4.2%
Swiss Franc3.6%

Source: Intercontinental Exchange

Any changes in these respective currencies can affect the performance of the U.S. dollar.

Post-Election Performance

For each U.S. election from 1988 to 2016, we calculated the U.S. dollar index’s percentage change since election day. Changes were tracked over the course of a year, or 250 trading days.

There was no clear trend in U.S. dollar performance after U.S. elections. Here’s another look at the data, this time showing the range in changes over the year and percentage change at the end of the period.

U.S. Dollar Performance After U.S. Elections

The U.S. dollar finished up in four years, and down in the other four years. The years after the 1988, 1996, and 2008 elections saw the largest fluctuations in values.

In 1989, the U.S. dollar surged due to three factors:

  • High interest rates, which attracted foreign investment
  • Political instability in West Germany and Japan
  • Strength of American stock and bond markets

In the period after the 1996 election, the dollar climbed again. While foreign currencies collapsed amid the Asian financial crisis, the U.S. economy enjoyed rapid growth and was seen as a safe haven for investors.

On the flip side, the U.S. dollar saw significant declines in the year after the 2008 election. The European Central Bank lowered rates in response to the global financial crisis, raising confidence in the euro and causing the U.S. dollar to fall.

What Investors Can Focus On

In each case above, significant movements were caused by macroeconomic factors, rather than the outcome of the U.S. election.

Here are a few factors that can have a direct impact on market performance:

  1. Inflation decreases the value of a dollar over time. Investors should consider how prevailing interest rates compare to inflation, and look for assets that build wealth over time.
  2. Unemployment rates have widespread impact. When unemployment is high, economic output and consumer spending are reduced.
  3. Economic growth signals healthy demand, and may boost corporate profits and drive up asset prices.

While elections can cause investors to change their asset mix, it’s important for investors to focus on long-term, broader factors that directly influence the market.

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