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Visualized: How Bonds Help Reduce Bear Market Risk

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Bear Market

Bear Market Risk

This infographic is available as a poster.

Visualized: How Bonds Help Reduce Bear Market Risk

Which tactics can investors use to reduce portfolio downside risk?

One time-tested method is allocating to bonds. Bonds have sheltered portfolio losses during bear markets thanks to the lower risk profile of bonds compared to stocks. Often, when stocks declined during market selloffs, safer assets like bonds tended to increase as the demand for stability grew.

This Markets in a Minute from New York Life Investments shows the performance of bonds and stocks during bear markets since World War II.

Bond Performance During Bear Markets

Bear markets are defined as a 20% or more decline in U.S. large cap stocks from peak to trough. Since World War II, bear markets have occurred less frequently than bull markets, with the U.S. stock market spending 29% in a bear market versus 71% in a bull market.

With this in mind, we show how a spectrum of portfolio asset allocations to stocks and bonds have performed over the last several bear markets.

  • Stocks: represented by U.S. large cap stocks
  • Bonds: represented by U.S. intermediate government bonds, which are issued with maturity dates between two and five years
Allocation (Stock / Bond)Average DrawdownAverage Time Until Recovery*
100% / 0%-34%3.3 years
90% / 10%-31%3.2 years
80% / 20%-28%2.9 years
70% / 30%-24%2.8 years
60% / 40%-20%2.5 years
50% / 50%-16%2.1 years
40% / 60%-11%1.2 years
30% / 70%-7%0.8 years
20% / 80%-4%0.8 years
10% / 90%-2%0.5 years
0% / 100%-1%0.2 years

*Length of time until new all-time high

For a 100% stock portfolio, the average drawdown was -34%, with 3.3 years until recovery—the time it took to reach a new all-time high.

Comparatively, a portfolio entirely made up of bonds fell -1% on average during bear markets with a recovery time of just a few months.

Balanced Portfolios in Bear Markets

Looking closer, we show how adding bonds to a portfolio has cushioned portfolio losses over the following market downturns, sometimes by as much as 20 percentage points.

Bear Market100% Stock Portfolio Max Drawdown60/40 Portfolio Max Drawdown
2020-20%-10%
2008-51%-30%
2001-45%-22%
1988-30%-17%
1973-43%-26%
1969-29%-18%
1962-22%-13%
1947-22%-13%

A balanced 60/40 portfolio had a 20% average drawdown, recovering in 2.5 years. During the 2020 COVID-19 crash, for instance, a 60/40 portfolio fell almost 10% and fully recovered in six months. By contrast, a 100% stock portfolio declined nearly 20%.

In all of the above historical downturns, investors with a diversified portfolio have been better positioned in a bear market.

Building Portfolio Strength

Bonds have historically seen less volatility than stocks during tougher financial conditions. Typically, riskier assets like stocks have been more prone to market fluctuations than bonds.

To prepare for a bear market, investors can structure a portfolio that aligns with their risk tolerance. Over the long run, the diversification benefits of bonds have been fundamental to protecting portfolios and lowering risk.

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Markets in a Minute

Identifying Trends With the Relative Strength Index

When is the S&P 500 Index considered overbought or oversold? The relative strength index may offer some answers to identifying market trends.

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Identifying Market Trends: The Relative Strength Index

What happens when the S&P 500 Index enters oversold territory? Does the market reverse, or continue on this trend?

A widely-used momentum indicator, the relative strength index (RSI) may offer some insight. The RSI is an indicator that may show when a stock or index is overbought or oversold during a specific period of time, indicating a potential buying opportunity.

This Markets in a Minute from New York Life Investments looks at the RSI of the S&P 500 Index over the last three decades to show how the market performed after different periods of overbought or oversold conditions

What is the Relative Strength Index?

The RSI measures the scale of price movements of a stock or index. In short, the RSI is used to calculate the average gains of a stock divided by the average losses over a certain time period. These are then tracked across a scale of 0 to 100. Broadly speaking, a stock is considered overbought if it reads 70 or above and it is considered oversold if it is 30 or below.

For example, when the S&P 500 Index has a RSI of 85, an investor may consider it overbought and sell their shares. Conversely, if the RSI hits 25, an investor may buy the S&P 500 thinking the market will bounce back.

The RSI is often used with other indicators to identify market trends.

The Relative Strength Index and S&P 500 Returns

Below, we show the 12-month returns of the S&P 500 Index after key ‘overbought’ or ‘oversold’ conditions in the market as indicated by the RSI:

DateRSIShiller PE Ratio*S&P 500 Index 12-Month Return
Jul 15 200220239.4%
Dec 4 200673274.5%
Oct 13 200815167.3%
Feb 7 201175231.9%
May 13 2013752316.1%
Jan 8 20188933-7.2%
Mar 16 2020222566.3%
May 3 202172370.0%

*Measured by the average inflation-adjusted earnings of the S&P over 10 years

As the above table shows, following each period of extremely oversold territory in the RSI, the S&P 500 Index had positive returns.

In fact, the S&P 500 Index had the strongest one-year returns following the COVID-19 crisis of March 2020, with over 66% 12-month returns. During the time of extreme fear, the RSI sank to deeply oversold territory before sharply rebounding.

Interestingly, following periods of extremely overbought conditions in the market there was a range of positive and negative performance. Most recently, before the peak of the last cycle in 2021, the S&P 500 Index spent roughly 9 months in ‘overbought’ territory before declining into 2022.

The Relative Strength Index in 2022

With the economy in uncertain territory, how does the RSI look today?

In early June, following a bleak consumer sentiment announcement, the RSI fell to 30, hovering on oversold territory. Since then, it has risen closer to 40 as consumer sentiment and perspectives on economic conditions have slightly improved.

However, whether or not the RSI will continue on this uptrend remains to be seen.

For the remainder of 2022, market sentiment, which may be shaped by the coming GDP and inflation figures, could push RSI into oversold territory once again. As a bright spot this may be good news—reinforcing a turning point in the market.

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Markets in a Minute

Mapped: The Growth in U.S. House Prices by State

On average, U.S. house prices grew by 18.7% from Q1 2021 to Q1 2022. How has price growth differed by state over various timeframes?

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U.S. map with states colored according to the growth in house prices from Q1 2021 to Q1 2022.

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The Growth in U.S. House Prices by State

On average, the U.S. housing market has seen price appreciation of 4.4% annually since 1991. High demand and low supply have accelerated price growth during the COVID-19 pandemic. In fact, single-family house prices grew by 18.7% from the first quarter of 2021 to the first quarter of 2022—the highest growth seen in at least 31 years.

This Markets in a Minute from New York Life Investments, the first in a three-part series on house prices, shows how house price growth has differed by state over various timeframes.

How Is House Price Growth Measured?

We used data from the Federal Housing Finance Agency’s (FHFA) House Price Index. The index measures changes in single-family home values and is seasonally adjusted. It is also a repeat-sales index, meaning it measures average price changes in repeat sales on the same properties.

FHFA obtains this information by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac.

Short and Long-Term Growth in House Prices

The below table shows house price growth over the last year, last five years, and since the first quarter of 1991. It should be noted that the growth measures up to March 2022, based on the latest available data. As of March 2022, higher mortgage rates had not yet translated into slower price growth.

State/District1-Year Rank 1-Year Growth
5-Year Growth
Growth Since Q1 1991
Florida129.8%81.5%389.1%
Arizona227.5%91.4%433.6%
Utah326.8%99.6%599.2%
Tennessee425.8%79.7%316.6%
Idaho525.5%121.6%509.2%
Montana625.2%77.1%532.5%
Nevada725.0%83.1%293.8%
North Carolina823.4%72.8%268.4%
Hawaii922.8%59.2%257.8%
South Carolina1022.7%67.0%263.0%
Georgia1122.1%70.7%261.2%
Maine1222.0%71.5%287.5%
Washington1321.8%83.1%466.4%
Colorado1421.6%70.6%578.6%
New Hampshire1521.2%66.7%285.3%
California1620.0%63.1%310.8%
Texas1719.8%58.7%310.6%
Alabama1819.7%58.6%218.5%
Arkansas1919.2%51.2%207.5%
South Dakota2018.3%56.7%326.8%
Vermont2118.1%50.8%238.9%
Oregon2218.0%63.1%514.3%
Oklahoma2317.6%47.3%232.1%
Wyoming2416.9%47.2%371.4%
Kentucky2516.8%52.2%232.7%
Mississippi2616.7%41.6%176.9%
Rhode Island2716.7%61.2%236.1%
Missouri2816.5%57.3%236.1%
Kansas2916.3%52.6%239.3%
Michigan3016.1%59.5%220.8%
Indiana3115.7%61.0%200.9%
Ohio3215.3%57.8%186.0%
Wisconsin3315.2%55.1%261.8%
Virginia3415.1%49.9%253.8%
New Jersey3515.1%50.8%231.0%
New Mexico3615.0%52.1%242.8%
West Virginia3714.8%38.3%181.7%
Massachusetts3814.8%54.8%300.1%
Nebraska3914.6%53.8%264.9%
Pennsylvania4014.5%49.4%208.6%
New York4114.4%50.3%233.1%
Connecticut4213.5%43.9%137.1%
Maryland4313.1%40.6%229.0%
Delaware4413.0%47.6%182.7%
Illinois4513.0%35.3%159.0%
Minnesota4612.7%48.5%284.8%
Iowa4712.5%38.1%215.5%
Louisiana4812.3%31.5%248.1%
Alaska4910.5%29.1%222.4%
North Dakota5010.4%26.2%280.6%
D.C.516.6%34.8%555.6%

Over the last year, the growth in prices was highest in Florida. Close to a thousand people move to Florida every day, and some snowbirds have decided to make Florida their permanent home.

Arizona follows closely behind, with one-year house price growth reaching 27.5%. Houses are not being built fast enough to meet demand. While Phoenix and the surrounding areas have plenty of single-family homes, there is little high-density housing due to zoning restrictions.

If we take a longer view, house prices have grown the fastest in the West since 1991. Utah saw the highest growth of 599.2%. The state’s population has gotten three times larger over the last 50 years, due to both migration and a high fertility rate. Some are drawn by high tech opportunities that earned the state the nickname “Silicon Slopes”.

Of course, the above data has limitations in that it is across entire states. The FHFA also shares the metro areas with the highest house price growth over the last year. In line with state growth, the top four areas are all in Florida. However, number five on the list is Knoxville, Tennessee. The price growth is partly due to a supply shortage. Knox County had 1,332 active listings in 2019, and just 324 listings by the end of 2021.

The Factors Driving the Growth in House Prices

While home price growth has accelerated during the COVID-19 pandemic, the supply-demand imbalance has been building over time.

The U.S. built 276,000 fewer homes annually between 2000-2020 compared to the 30 years prior. Zoning restrictions in some areas have also limited the number of housing units that can be built on a parcel of land. Since the 2008 global financial crisis, roughly 64% of all authorized housing has been single-family homes. Ultimately, the lack of housing has helped drive up prices.

The magnitude of the price gain depends on where a homeowner had purchased. Historically, the growth in real estate prices has been highest in areas with strong job prospects, high population growth, and low housing supply.

In the second part of the house price series, we’ll explore the relationship between house prices and inflation.

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