Investing within acceptable risk is one of the most important things we can do as investors. Occasional bear stock markets challenge even experienced stock market investors when it comes to managing risk. After investing through several bear markets over the past 40 years, I’ve learned that one of the best ways to lower stock market risk is by owning assets that go up when stocks go down.
Treasury bonds, gold, inverse ETF’s, short stock positions, and stocks in specific sectors, such as consumer staples or companies which profits from economic adversity, often go up when the broad stock market goes down.
U.S. Treasury bonds are the most common investment held as a hedge against stock market declines.
Gold is thought to be a good hedge against stock bear markets. You may be surprised, however, by what really goes up when stocks go down, on a very consistent basis, and based on historical data so keep reading.
Below are 7 assets that frequently or always go up when stocks go down. Even though these assets can be a performance drag during strong bull markets, owning one or more of them during bear markets can certainly benefit stock investors. These assets range from investments as simple as cash to higher risk inverse ETF’s as you’ll see below.
What Goes Up When Stocks Go Down?
We’ve all heard that gold is the most reliable asset to go up when stocks go down. While many investors are convinced owning gold is the best way to hedge against stock market crashes, gold has not always gone up during prior bear markets.
As an investor myself, I recalled that gold did not go up when stocks went down in 2008, at least not in a clear cut fashion. This led me to do a little more research.
My memory was that in 2008 gold was volatile as investors feared the demand for gold would be down on a global basis. In hindsight, gold pricing is more much complex than simply a shift in demand as you’ll see.
What Did Gold Do in 2008 When Stocks Went Down?
As you may recall, the bear market related to the financial crisis began in late 2007 and ended in 2009.
This was a major and extended bear market that set many stock investors back for years, making 2008 a perfect year to study whether gold goes up when stocks go down.
Gold went up 5.6% in 2008 while stocks, as represented by the S&P 500, dropped 38.49% in 2008. On a dollar basis, during 2008, gold went as high as $1,003.20 on March 17, 2008, and as low as $722.70 on October 22, 2008.
|Gold Price Increase in 2008|
|Gold Prices on January 1, 2008||$833.50|
|Gold Prices on December 31, 2008||$880.15|
|Increase in Price of Gold 2008||$46.65|
This means that gold was an effective hedge against the stock market decline in the year 2008 since it ended the year up.
(Note: the prices above are based on 3 pm MT USA which explains the slight variations in my research.)
Insightful gold investors did not have a smooth ride in 2008, however, as you can see from the wild price swings.
Despite this, gold was an asset that did go up when stocks went down for the calendar year of 2008 based on where it began and ended the calendar year.
Here is an informative short video on billionaires who have used gold as a hedge. (I have no affiliation whatsoever.)
Be sure to continue reading this post, however, to see other assets that go up when stocks go down.
Why Didn’t Gold Go Straight Up When Stocks Went Down in 2008?
If gold is meant to go up when stocks go down, why was gold so volatile in 2008 instead of just going up?
For one thing, the price of gold is strongly affected by the US dollar which adds another layer of complexity. Perhaps even more important, gold is a “source of funding for margin calls made on declining assets” as explained in this Seeking Alpha post by Plan B Economics. This dynamic leads gold to experience forced selling at times.
Much of the reason why gold was so volatile when stocks fell in 2008 was due to the borrowing and selling of gold on the market so banks could meet the required liquidity requirements during the financial crisis. There is more about this paradigm in an excellent article here for those of you who appreciate complex financial topics.
Gold Vs Stocks in Bear Market History
The chart below shows how gold has gone up or down vs stocks over past stock market declines since 1976. The fact that gold went down when stocks went down in both the 1980 bear market and the 1998 stock market correction shows that gold is not always negatively correlated to stocks.
Gold price movement was, however, negatively correlated in 6 of the 9 stock market declines of 19% or more since 1976. Then in March of 2020, as stocks dropped during the economic shutdown, gold dropped also before it resumed an uptrend shortly thereafter.
So, as you can see, gold has not consistently gone up when stocks have gone down significantly which leads me to wonder: will gold go up when stocks go down in the future?
Maybe – I like to own at least some assets that have a more reliable probability of going up when stocks go down.
|How Much Stocks Dropped (S&P 500)||S&P 500 - % Up - Down||Gold - % Up - Down|
|Sept 21,1976 - Mar 6,1978||-19.4||53.8|
|Nov 28,1980 - Aug 12,1982||-27.1||-46|
|Aug 25,1987 - Dec 4,1987||-33.5||6.2|
|Jul 16,1990 - Oct 11,1990||-19.9||6.8|
|July 17,1998 - Aug 31, 1998||-19.3||-5|
|March 27,2000 - Oct 9,2002||-49||12.4|
|Oct 9,2007 - Mar 9,2009||-56.8||25.5|
|May 10,2011 - Oct 3,2011||-19||9.4|
|Feb 19,2020 - Mar 23,2020||-33.9||-4.9|
|Table Created By Author. Data Source: goldsilver.com goldsilver.com||-30.9||6.5|
Do Bonds Go Up When Stocks Go Down?
Bond investments are also considered a good way to offset stock market risk in a portfolio.
There are many different types of bonds ranging from highly leveraged risky bonds to Treasury bonds. Different types of bonds go up when stocks go down and vice versa.
Risky bonds tend to go down when stocks go down since investors become more risk averse during times of uncertainty. On the other hand, US Treasury bonds almost always move opposite the stock market during bear markets. Therefore, Treasury bonds are used to offset market stock risk by most financial advisors using a standard asset allocation model based on a long term investing plan.
Read my related post on how to avoid problems when hiring a financial advisor.
Did Bonds Go Up When Stocks Went Down in 2008?
TLT, an index that represents the 20+ year Treasury Bond, was up 33.76% in 2008, while the S&P 500 stock index dropped 38.49% that same year.
While Treasury bonds did far outperform stocks in 2008, it’s worth noting that the Treasury bond index, TLT, declined 21.53 in 2009.
Read my related post on how bonds performed in 2008.
These numbers certainly support the case for tactical investment strategies for investors who want to offset or avoid at least some of the big swings down in both the stock and bond markets.
Read more about other defensive investments in my related post.
Why Do Bonds Go Up When Stocks Go Down?
Treasury bonds go up during bear stock markets because investors flock to investments perceived as safe.
Remember bear markets are usually tied to the economy slowing. During such times, the Federal Reserve lowers interest rates when the economy slows to stimulate economic growth again.
A core investing principle is that bonds go up when interest rates decline. As a result, bonds usually rise when stocks go down but the timing of this relationship is not exact. In fact, financial markets anticipate events before they happen as the large institutional “smart money” rushes to buy bonds in anticipation of lower interest rates.
This may sound complex, but it is very logical and simple when you think about it.
Here’s my video on how the economy affects stock prices using simple terms and big picture perspectives as I always do when talking about investing and finance.
Do Treasury Bonds Always Go Up When Stocks Go Down?
If only risk management were simple enough that every time stocks had gone down in the past Treasury bonds had gone up. That would be so easy for us investors.
Unfortunately, however, bonds haven’t always gone up when stocks have gone down.
I created the chart below to show the years since 1969 in which stocks went down OR Treasury bonds went down to illustrate this point.
Regarding the chart, note that T bills return about the same as a money market fund. T bills have never had a year of negative performance from 1929 through 2018 so it is safe to say that cash (money market) is an asset that goes up when stocks go down, albeit slightly. This is covered more in the Cash section below so keep reading.
As you can see, in 1969 both stocks went down and bonds went down. This confirms the somewhat disappointing reality that U.S. Treasury bonds have not always gone up when stocks have gone down as is commonly believed.
And in 2018, Treasury bonds went down a tiny .02% while stocks went down 4.23%. This is hardly worth mentioning since the Treasury bond decline was so small, but it did discredit the assumption that stocks and Treasury bonds are always negatively correlated.
It is, however, safe to say that US Treasury bonds have a very high probability of going up when stocks go down, making ownership of them a legitimate way to offset stock risk for most bear markets. As an investor, I find weighing probabilities about as helpful an investment tool as anything else.
One thing that is important to note from the bond data above is that the Treasury bond performance includes the coupon or interest. In other words, the bond performance includes interest received from owning the bonds in addition to any increase or decrease in the value of the bonds themselves.
The Danger of Bonds
As you can see, bonds almost always go up when stocks go down, but they aren’t perfect.
Aside from the fact that most bonds now have a negative real return, another problem with bonds is that they can be disasters for investors when inflation rises.
This is because interest rates rise when inflation rises. When this happens, the value of bonds drop.
Not only this, but investors are stuck with fixed income (on a depreciating asset) that loses purchasing power with inflation.
Bonds are often sold as being low risk investments due to their ability to offset stocks during bear markets, but be sure to understand and estimate the potential risk of bonds, and any other investment, before making it.
Read my related post What Are the Risks of Bonds?
Stocks That Go Up When Overall Stocks Are Dropping
Consumer staple stocks often go up when the stock market as a whole goes down during bear markets. This is because people need to buy certain things, such as toothpaste and food, to live no matter what.
In the dot.com crash between March 2000 and October 2002, for example, consumer staples rose 1.2%. During the financial crisis from October 2007 through March 2009, consumer staples fell a whopping 28.5% but much less than the S&P 500’s drop of over 56%.
Read my related post How Will a Stock Market Crash Affect You?
Stocks That Rose in 2008
Some rare stocks went up as the overall stock market fell in 2008. This is unusual since almost all stocks move in the same overall direction as the market.
Some of the stocks that went up in 2008 represent companies that sell products that can be considered consumer staples.
Many of them made strategic corporate moves in 2008, however, which subsequently increased profits.
I recall from prior bear markets that the stocks of companies that sell very low priced products, such as Dollar Tree, tend to hold up better in bear markets. This is because people who bought medium priced products switch to lower priced products during bad economic times which tend to accompany stock market declines. And low net worth consumers continue to buy low priced products.
For example, the following stocks went up in 2008 for various reasons which support the two reasons stated.
- Ross Stores – ROST
- Walmart – WMT
- McDonald’s – MCD
- Dollar Tree – DLTR
- Hasbro – HAS
- Amgen – AMGN
- Gilead – GILD
- Celgene – CELG
- Budweiser – BUD
- AutoZone – AZO
- H&R Block – HRB
- Church & Dwight – CHD
It makes sense that these companies did better than most during the recession based on the markets they serve, but again, several of these companies made strategic moves during the bear market which increased their profits. There were thousands of companies that served a similar market or sold products in the same sector that tanked during the bear market of 2008.
It’s also important to note that after looking at the charts of these stocks, many of them had big swings up or down in the years immediately before and after the 2008 bear market. So this wasn’t necessarily a slam dunk.
Read my post Stocks That Went Up in 2008 with details about why each stock above went up when most stocks were going down while the country was entering a brutal recession.
Stocks That Went Up in the 2020 Bear Market
The performance of certain stocks in the fast bear market of 2020 supports my earlier claim that, depending on the situation, certain stocks go up when the overall stock market goes down.
Many pharmaceutical companies, for example, rose in anticipation of a cure during the pandemic.
Retail companies that could benefit from the shutdown through increased online shopping saw their stocks go up as the overall market declined.
Finally, many technology companies that could benefit from the surge in the number of people working from home also saw their stocks increase during the fast 2020 bear market.
Money Market Funds Have Positive Returns When Stocks Go Down
Money market funds returns are positive when stocks go down, albeit slightly.
Since money market values do not fluctuate, the increase is usually very minimal since the increase in value comes from interest, assuming the interest is kept in the account.
While this seems inconsequential, having an asset that goes up 1 or 2% can be a real lifesaver when stocks have gone down over 50%!
It’s easy to forget that money market funds are an asset class, and sometimes a darn good one at that.
In fact, in 2018, FTSE 3 month T-bill index was the best performing sector among intermediate bonds, municipal bonds, corporate bonds, global bonds, high yield bonds, emerging market bonds, and stocks (S&P 500 index).
And short term debt, which I’ll loosely call cash, was the best investment among the asset classes of large cap stocks, REITs, large cap value stocks, small and mid-cap stocks, commodities, and international stocks in 2018, too.
Before getting too excited about money market funds (short term debt or cash) I must remind myself that inflation has averaged about 2% in the past decade or so.
Inflation in 2018 was 2.44%. Considering this, cash would have delivered about a slightly negative zero real return in 2018. In 2008, however, a zero real return would have thrilled most stock market investors.
Read my related post on cash allocation in a portfolio.
Your Own Assets
As you may have read here, I believe that one of the best ways to reduce investment risk is by owning your own alternative assets outside of stocks and bonds because such assets can go up when stocks go down. This has worked very well for us with both real estate rental properties and online business.
While real estate values may go down when stocks go down, the demand for renting often increases during hard economic times since many people delay home buying. This usually drives the price of rents up.
As for online business, the type of online business will affect whether this asset goes up or down in relation to stock moves.
Many online businesses, however, will hold their value, if not increase in value and provide income during bear stock markets. Just like the individual stocks referenced above, an online business’s sector determines its ability to become more profitable during bear stock markets.
Online businesses are slowly but surely gaining a reputation as legitimate assets that can be used to build wealth in addition to generating income with little to no capital.
Read my related post Owning a Business Vs Real Estate.
There are two more assets that go up when stocks go down, but they are best for advanced investors or professional wealth managers only.
As an investor, however, I think it’s important to be aware of them since many funds and wealth managers use these advanced investing strategies. Many investors who invest in funds and with wealth managers don’t realize they already own inverse funds or options in their accounts.
I am not necessarily against these hedging strategies for someone who is an expert in their use. I think it’s important, however, to understand how your wealth is invested if you do not do your own investing so I’m including them in this article.
Not only that, but inverse stock funds certainly go up when stocks go down, which is the topic of this post.
Stock Inverse ETF’s
Inverse ETF’s move in the opposite direction of the asset they represent. These are referred to as short ETFs. Many short ETFs are leveraged, meaning they move two to four times opposite that of the underlying asset.
Again, inverse ETF’s are best for experienced investors who are willing to accept the risk that comes with them. While in theory inverse ETFs make a lot of sense, it’s easy to get whipped around as stock market trends change. Plus, inverse ETFs tend to be very volatile.
Many funds and wealth managers, as well as sophisticated individual investors, buy put options to hedge against drops in the stock market. The value of these puts goes up as stocks go down in value.
Cons of Using Puts to Hedge Stock Risk
The cons of buying puts to lower stock market risk are:
- Investors can get whipped around as markets change direction.
- Learning how to buy puts to hedge stock portfolio risk is a learned skill
- Options decrease in value as you own them due to time decay
- Buying puts to hedge is not as simple as buying a Treasury ETF to hedge
Pros of Using Puts to Hedge Stock Market Risk
The pros of using puts to hedge stock market risk are:
- Buying puts is not terribly complex
- Puts provide inexpensive insurance against stock market risk
- Puts are a very effective hedge against stock risk when done correctly
Owning puts to reduce stock market risk is another strategy that is best only for proactive investors eager to learn how to use puts to lower portfolio risk. Read my related post How to Reduce Risk While Building Wealth.
What Assets Have Performed Best in Bear Markets?
It’s hard to keep track of what assets have done best in bear markets. This colorful asset class chart from MFS does a great job of making it easy to see which assets have gone up when stocks have down, by year, over a 20 year time frame.
It’s one of my favorites, so take a look.
Summary for What Goes Up When Stocks Go Down
Now you have seen 7 assets that go up when stocks go down at least most of the time.
It’s important to understand how much investment risk you have at any given time so you can lower risk if you see it is too high.
Thanks for visiting my website. Feel free to share this post with anyone you think will benefit from it.
The best place to start building wealth is with my Ultimate Wealth Plan. You can get it here now.
Thanks to these fantastic sources in addition to the sources linked above in article: Stocks vs bonds in bear markets chart – Aswath Damodaran – http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Chart with gold vs stocks – https://goldsilver.com/blog/if-stock-market-crashes-what-happens-to-gold-and-silver/
MFS Asset Chart: https://www.mfs.com/content/dam/mfs-enterprise/mfscom/sales-tools/sales-ideas/mfsp_20yrsa_fly.pdf