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Markets in a Minute

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

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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

Charted: Unemployment and Recessions Over 70 Years

Despite market uncertainty, U.S. unemployment is low, at 3.7%. In this infographic, we show unemployment and recessions since 1948.

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Unemployment and Recessions

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Charting Unemployment and Recessions Over 70 Years

As of August 2022, the U.S. unemployment rate sits at 3.7%, below its 74-year average of 5.5%.

Why does this matter today? Employment factors heavily into whether economists determine the country is in a recession. In fact, in the last several decades, employment-related factors have some of the heaviest weightings when a recession determination is made.

In this Markets in a Minute from New York Life Investments, we look at unemployment and recessions since 1948.

Why Is the Unemployment Rate Important?

To start, let’s look at how unemployment affects the economy.

During low unemployment and a strong labor market, wages often increase. This is a central concern to the Federal Reserve as higher wages could spur more spending and notch up inflation.

To curb inflation, the central bank may increase interest rates. As the economy begins to feel the effects of rising interest rates, it may fall into a recession as the cost of capital increases and consumer spending slows.

Who Determines It’s a Recession?

A committee of eight economists at the National Bureau of Economic Research (NBER) in Massachusetts make the call, although often several months after a recession has happened. As a result, employment data often acts as a lagging indicator.

This committee of academics looks at a number of variables beyond two consecutive quarters of negative GDP growth. Other factors include:

  • Nonfarm payroll employment
  • Real personal income less transfers
  • Real personal consumption expenditures
  • Industrial production
  • Wholesale retail sales adjusted for price changes
  • Real GDP

A widespread decline in economic activity across the economy, as opposed to just one sector, is also considered.

Unemployment and Recessions Over History

Over the last 12 business cycles, the unemployment rate averaged 4.7% at the peak and 8.1% during the trough. The below table shows how the unemployment rate changed over various U.S. business cycles, with data from NBER:

Peak Month Unemployment RateTrough Month Unemployment Rate
Nov 19483.8%Oct 19497.9%
Jul 19532.6%May 19545.9%
Aug 19574.1%Apr 19587.4%
Apr 19605.2%Feb 19616.9%
Dec 19693.5%Nov 19705.9%
Nov 19734.8%Mar 19758.6%
Jan 19806.3%Jul 19807.8%
Jul 19817.2%Nov 198210.8%
Jul 19905.5%Mar 19916.8%
Mar 20014.3%Nov 20015.5%
Dec 20075.0%Jun 20099.5%
Feb 20203.5%Apr 202014.7%

In 1953, following post-WWII expansion, the unemployment rate fell to 2.6%, near record lows.

During this time, the economy faced strong consumer demand and high inflation after a period of prolonged low interest rates. To combat price pressures, the Federal Reserve increased interest rates in 1954, and the economy fell into recession. By May 1954, the unemployment rate more than doubled.

In 1981, the unemployment rate was high during both the peak of the cycle (7.2%) and the trough (10.8%) by late 1982. This marked the end of the 1970s stagflationary era, characterized by slow growth and high unemployment.

More recently, at the peak of the business cycle in 2020 the unemployment rate stood at 3.5%, closer to levels seen today.

Unemployment Today: A Double-Edged Sword

As of July 2022, the number of job vacancies is at 11.2 million, near record highs.

To reign in the inflationary pressures of the current job market—which saw year-over-year wage increases of 5.2% in both July and August—the Federal Reserve may take a more aggressive stance on interest rate hikes.

The good news is that labor force participation is increasing. As of August, labor force participation was within 1% of pre-pandemic levels, offering relief to the labor market supply. Higher labor force participation could lessen wage growth without unemployment levels having to rise. Since more people are competing for jobs, there is less leverage for salary negotiation.

Going further, one study shows that since the Great Financial Crisis, labor market participation has had a greater influence on wage growth than unemployment levels or job openings.

Against these opposing forces of higher job vacancies and higher labor market participation, the outlook for unemployment, along with its wider effects on the economy, remain unclear.

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Markets in a Minute

How Closely Related Are Historical Mortgage Rates and Housing Prices?

With mortgage rates climbing, could housing prices drop? We explore the relationship between historical mortgage rates and house prices.

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Scatterplot showing the relationship between historical mortgage rates and house prices

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Are Historical Mortgage Rates and House Prices Related?

Mortgage rates are rising at their fastest pace in at least 30 years. As mortgage rates climb, it becomes more expensive to finance a home purchase. This leaves many homebuyers with lower budgets. Could house prices drop as a result?

In this Markets in a Minute from New York Life Investments, we explore the relationship between historical mortgage rates and housing prices over the last 30 years. It’s the last in a three-part series on house prices.

Historical Mortgage Rates vs Housing Prices

To compare trends in historical mortgage rates and housing prices over time, we calculated year-over-year percentage changes. We used monthly data spanning from January 1992 to June 2022. Here’s a summary of movements over that timeframe.

Scenario# of Months
Mortgage Rate Decline, House Price Growth193
Mortgage Rate Growth, House Price Growth117
Mortgage Rate Decline, House Price Decline49
Mortgage Rate Growth, House Price Decline6

November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

Mortgage rates and house prices have a weak positive correlation of 0.26. This means that when mortgage rates increase, house prices typically also increase. What could be contributing to this trend? Mortgage rate increases are associated with periods when the Federal Reserve is raising its policy rate in response to inflation that is higher than desired. Often, this coincides with strong economic growth, low unemployment, and rising wages, which can all strengthen home prices.

Over the last 30 years, it was quite rare for mortgage rates to rise while house prices simultaneously dropped. This only occurred in the early stages of the Global Financial Crisis and during the recovery.

DateMortgage Rate YoY ChangeHouse Price YoY Change
Aug 20070.8%-0.6%
Oct 20071.1%-1.9%
Jan 20101.6%-2.9%
Apr 20106.3%-1.5%
May 20103.3%-1.4%
Jul 20110.4%-3.8%

While mortgage rates saw some upward movement in the wake of the Global Financial Crisis, it took the housing market longer to recover. In fact, housing prices didn’t see a positive year-over-year change until March 2012.

Is There a Lag Effect?

A change in mortgage rates may not be immediately reflected in housing prices. To test whether there was a lag effect, we also explored the relationship between historical mortgage rates and housing prices two years later.* For instance, we compared the annual percentage change in mortgage rates in 2020 to housing price growth in 2022.

Here’s what the data looked like with this two year lag of housing price growth.

Scenario# of Months
Mortgage Rate Decline, House Price Growth190
Mortgage Rate Growth, House Price Growth97
Mortgage Rate Decline, House Price Decline37
Mortgage Rate Growth, House Price Decline17

*We tested for a lag effect using house prices six months later, one year later, two years later, and three years later. The data using house prices 6 months later and three years later revealed no correlation between mortgage rates and housing prices. The data using house prices one year later revealed the same correlation as using house price data from two years later. November 2006 has been excluded from the above tally as year-over-year mortgage rate growth was 0.0% at that time.

The pattern was similar, albeit with a slightly negative correlation of -0.15. In other words, mortgage rates and house prices tended to move in opposite directions.

For example, this occurred in 2020 when mortgage rates were dropping and the Federal Reserve had not yet begun to raise its policy rate. Two years later in 2022, house prices were seeing record high levels of growth amid strong demand and low supply.

Compared to our first analysis above, there were also more instances where mortgage rates increased and house prices decreased. This activity all related to mortgage rates rising from 2005-2007 amid inflation concerns, with housing prices crashing in the following years due to subprime mortgages and the Global Financial Crisis.

Historical Mortgage Rates: One Piece of the Puzzle

Could the current rising mortgage rates cause housing prices to drop? In the last 30 years, there is no historical precedent for this apart from the Global Financial Crisis. Of course, subprime mortgages—mortgages to people with impaired credit scores—contributed to the housing market collapse at that time.

While researchers believe it’s unlikely housing price growth will turn negative, the pace of growth is slowing down. We can see this in the below chart showing trends between historical mortgage rates and housing prices over time.

Changes in historical mortgage rates and house prices over time. When the year-over-year mortgage rate changes has been above 20% for more than two months in a row, the pace of house price growth has slowed.

Historically, a slowdown in house price growth has occurred when mortgage rates increase rapidly. Since 1992, there have been four instances when mortgage rates rose over 20% year-over-year for more than two months in a row. Each of them has been accompanied by a deceleration in house price growth.

Time PeriodHouse Price YoY Change at StartHouse Price YoY Change at End
Sep 1994-Feb 19953.1%2.9%
Aug 2013-May 20147.2%4.7%
Sep 2018-Dec 20185.8%5.5%
Jan 2022-Jun 202218.4%16.2%

Note: House price data only available until June 2022 and does not reflect any fluctuations since that time.

In the first half of 2022, house price growth slowed by over two percentage points. However, it’s important to keep in mind that while mortgage rates and affordability can play a role in the housing market, there are other factors at play. The current market is buoyed by high demand as millennials reach their prime home buying years, coupled with a housing supply shortage.

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