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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

Asset Class Risk and Return Over the Last Decade (2010-2019)

Asset allocation is one of the most important decisions an investor can make. This chart shows asset class risk and return from 2010-2019.

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Asset Class Risk and Return

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

The Importance of Asset Classes

Asset allocation is one of the most important decisions an investor can make. In fact, studies have found that the percentage of each asset type held in a portfolio is a bigger contributor to returns than individual security selection.

However, it’s important for investors to select asset classes that align with their personal risk tolerance—which can differ based on how long they plan to hold an investment—and their targeted returns. This Markets in a Minute chart from New York Life Investments shows asset class risk and return data from 2010-2019 to highlight their different profiles.

Asset Class Risk and Return

To measure risk and return, we took annualized return and standard deviation data over the last ten years.

Annualized returns show what an investor would have earned over a timeframe if returns were compounded. It is useful because an investment’s value is dependent on the gains or losses experienced in prior time periods. For example, an investment that lost half of its value in the previous year would need to see a 100% return to break even.

Standard deviation indicates risk by measuring the amount of variation among a set of values. For example, equities have historically seen a wide range in returns, meaning they are more volatile and carry more risk. On the other hand, treasuries have typically seen a smaller range in returns, illustrating lower volatility levels.

Below is the risk and return for select asset classes from 2010-2019, organized from lowest return to highest return.

Asset ClassAnnualized ReturnAnnualized Standard Deviation
Global Commodities-5.38%16.60%
Emerging Markets Equity-0.89%16.95%
Treasury Coupons0.73%0.81%
Investment Grade Bonds3.17%2.92%
Hedge Funds4.05%5.70%
Corporate Bonds5.55%5.26%
Global Listed Private Equity5.59%18.63%
1-5yr High Yield Bonds6.71%1.00%
Global Equity6.75%12.50%
Global Equity - ESG Leaders6.87%12.03%
Taxable Municipal Bonds7.20%7.33%
Real Estate Investment Trusts8.44%11.03%
U.S. Mid Cap Equity11.00%13.60%
U.S. Large Cap Equity11.22%11.39%
Dividend-Paying Equity11.81%10.24%
U.S. Small Cap Equity11.87%14.46%

Note: See the bottom of the graphic for the specific indexes used.

Global commodities saw the lowest return over the last 10 years. Plummeting oil prices, and an equities bull market that left little demand for safe haven assets like precious metals, likely contributed to the asset class’ underperformance.

Backed by the U.S. federal government, Treasury coupons had the lowest volatility but also saw a relatively low return of 0.73%. In contrast, 1-5 year high yield bonds generated a return of 6.71% with only slightly more risk.

With the exception of emerging market equity, all selected equities had higher risk and relatively higher historical returns. Among the stocks shown, dividend-paying equity saw the highest returns relative to their risk level.

Building a Portfolio

As they consider asset class risk and return, investors should remember that historical performance does not indicate future results. In addition, the above data is somewhat limited in that it only shows performance during the recent bull market—and returns can vary in different stages of the market cycle. For example, commodities go through multi-decade periods of price ascent and decline known as super cycles.

However, historical information may help investors gauge the asset classes that are best suited to their personal goals. Whether an investor needs more stability to help save for a near-term vacation, or investments with higher return potential for retirement savings, they can build a portfolio tailored to their needs.

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Markets in a Minute

The Pyramid of Equity Returns: Almost 200 Years of U.S. Stock Performance

From 1825-2019, equities have had positive annual performance over 70% of the time. This chart shows historical U.S. stock market returns.

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Historical Stock Market Returns

After the fastest bear market drop in history, the S&P 500 rallied and now has a year-to-date total return of -4.7%. The year is not over, but in the context of history, is this in line with what’s considered a “normal” return, or is it more of an outlier?

In today’s Markets in a Minute chart from New York Life Investments, we show the distribution of U.S. equity returns over almost 200 years.

Total Returns By Year

The chart shows total annual returns, which assumes that dividends and other cash distributions are reinvested back into the index.

It’s also important to note that different indexes and data collection methods are used over the timeframe. From 1825-1925, numbers come from researchers at Yale University and Pennsylvania State University. They collected price and dividend data for almost all stocks listed on the New York Stock Exchange during its early history.

From 1926-1956, returns are from the S&P 90, the S&P 500’s predecessor. Finally, from 1957 to date, returns are based on the S&P 500.

Here are historical stock market returns by year:

YearTotal Return
18252.53%
18262.03%
18272.97%
18282.82%
18293.21%
18302.83%
18311.70%
18323.02%
18332.94%
18342.91%
18352.83%
18361.59%
18372.11%
18386.27%
18395.28%
18403.53%
18414.87%
18425.77%
18437.18%
18446.85%
18454.16%
18463.36%
18475.55%
18485.17%
18497.60%
18503.73%
18514.44%
18524.52%
18534.11%
18541.99%
18552.09%
18563.00%
18573.39%
18582.83%
18592.86%
18602.41%
18613.21%
18623.60%
18633.52%
18644.18%
18653.97%
18664.39%
18674.50%
1868-
18694.18%
18704.20%
18715.86%
18726.33%
18736.51%
18747.47%
18756.61%
18766.86%
18775.31%
18785.54%
18795.80%
18805.28%
18815.48%
18825.32%
18835.65%
18845.81%
18855.53%
18864.23%
18874.43%
18884.36%
18894.28%
18904.14%
18914.78%
18924.44%
18934.54%
18944.76%
18954.42%
18964.17%
18974.27%
18984.21%
18993.72%
19004.98%
19014.66%
19024.15%
19034.35%
19044.72%
19054.00%
19064.19%
19074.47%
19086.09%
19094.87%
19104.56%
19115.19%
19125.27%
19135.12%
19145.22%
19155.85%
19165.91%
19177.04%
19188.38%
19196.71%
19205.72%
19216.75%
19226.98%
19236.04%
19246.43%
19255.91%
192611.62%
192737.49%
192843.61%
1929-8.42%
1930-24.90%
1931-43.34%
1932-8.19%
193353.99%
1934-1.44%
193547.67%
193633.92%
1937-35.03%
193831.12%
1939-0.41%
1940-9.78%
1941-11.59%
194220.34%
194325.90%
194419.75%
194536.44%
1946-8.07%
19475.71%
19485.50%
194918.79%
195031.71%
195124.02%
195218.37%
1953-0.99%
195452.62%
195531.56%
19566.56%
1957-10.78%
195843.36%
195911.96%
19600.47%
196126.89%
1962-8.73%
196322.80%
196416.48%
196512.45%
1966-10.06%
196723.98%
196811.06%
1969-8.50%
19704.01%
197114.31%
197218.98%
1973-14.66%
1974-26.47%
197537.20%
197623.84%
1977-7.18%
19786.56%
197918.44%
198032.42%
1981-4.91%
198221.55%
198322.56%
19846.27%
198531.73%
198618.67%
19875.25%
198816.61%
198931.69%
1990-3.10%
199130.47%
19927.62%
199310.08%
19941.32%
199537.58%
199622.96%
199733.36%
199828.58%
199921.04%
2000-9.10%
2001-11.89%
2002-22.10%
200328.68%
200410.88%
20054.91%
200615.79%
20075.49%
2008-37.00%
200926.46%
201015.06%
20112.11%
201216.00%
201332.39%
201413.69%
20151.38%
201611.96%
201721.83%
2018-4.38%
201931.49%

Source: Journal of Financial Markets, Slickcharts. The year 1868 has insufficient data to estimate a total annual return.

U.S. equity returns roughly follow a bell curve, meaning that values cluster near a central peak and values farther from the average are less common. Historically, they have been skewed towards positive performance.

Here is how the distribution of returns stack up:

Total Annual Return (%)-50 to -30-30 to -10-10 to 1010 to 3030 to 5050+
Number of Years Within Range3237765225
Percent of Years Within Range1.5%11.8%39.5%33.3%11.3%2.6%

While extreme returns can happen, almost 40% of annual returns have fallen within the -10% to 10% range.

Recessions and Recoveries

What does it look like when more abnormal returns occur? Due to the cyclical nature of the economy, recessions tend to be followed by strong recoveries.

recession and recovery stock market returns

In 1957, the year the S&P 500 was created, the stock market saw a loss of almost 11%. Stock prices shot up by over 43% the following year, bolstered by rising credit volumes and business profits.

Most recently, the 2008 global financial crisis led to one of the largest equity losses to date. In 2009, stocks climbed by almost 27%, boosted by expectations of higher capital spending and demand as the economy recovered.

What History Tells Us

While equities can have high volatility, returns have historically followed a positively-skewed bell curve distribution. From 1825-2019, the average total annual return was 8.25%. In fact, over 70% of total annual returns have been positive over the same timeframe.

Owning stocks long-term may help investors not only beat inflation, but also build a nest egg that may sustain them throughout their retirement years.

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