Opening (00:00)
This is Mark Peterson with the February 2025 BlackRock Student of the Market update.
Slide 2 (00:08)
This month, we’ll begin with a handful of slides on stocks and bonds, updates of some charts we’ve done in the past including markets concentration, money market assets and the real yield story on bonds then we’ll move on to correlation stock and bond correlation record highs. I think it’s one of the biggest stories out there. It’s higher than most folks realize, and then we’ll talk about how to diversify in the face of that challenge. Something that we’ve never seen this type of correlation between stocks and bonds in the history of investing. Where do you go to get that diversification and return?
Slide 3 (00:44)
Let’s begin with so goes January, so goes the year. This is the old market adage that January sets the tone for the rest of the year often a good signal and we were up 2.8% in January of this year. So certainly, a good sign, and you can see on the left side, really the last going back to 2009, all the various January starts and how the year finished up the next 11 months. You can see on the right side we just summarized it going back to 1926 and generally get off to a good start in January. You just have a positive January. The next 11 months, the average almost 13%, 12.8%. You can see the year finishes higher 80% of the time. So those are all better than the historical averages so the odds are definitely in your favor if you have a positive January and the opposite is true as well that if you have a negative January, you’ve got a 39% chance of finishing lower the rest of the year and an overall return averaging 7.6%. So you can see the difference. Of course, on the left, if we just bounce back to the left-hand side, you can see it doesn’t always work. You have periods like 2018. You got off to a great start in 2018, but you were down almost 10% the next 11 months. And in fact, if you look at most of the mid-2010’s, you started off a lot of those years in a negative hole but you finished off the year pretty strong. So thought that was interesting something we often see with the historic data that you have trends, but it doesn’t mean it works and pans out every year.
Slide 4 (02:20)
Moving on to market concentration, this is one we thought we’d update. This has been a big story as we all know in the market the last couple of years, just a handful of stocks driving all the return. That Magnificent Seven at the top, look what it did back in 2023. Those seven averaged over 111%. Last year, they did 60, so they had a nice rally to last couple months of the year and you can see the rest of the grouping eight through 20, 21 through 100 and the bottom 400 on the far right. Look at the eight through 20, they actually had a better year in 2024 so that gap shrunk a bunch. But as you move towards the right, you can see 21 through 100 was only up 21% which was lower than it was in 2023. Same thing with the bottom 400. So certainly, a trend that we’ve seen play out the gap shrunk last year. This year just for January and certainly January, one month is not a trend yet but the Mag Seven was actually the lowest performer. So we have seen the market broaden out a bit to start the year. I think, we’d all like to see that probably take hold here in 2025. We’d rather see more of the market participating in carrying some of the gains not just a handful of stocks in the market and the economy driving all the returns. That’s just not a healthy environment and certainly not sustainable forever. So something to keep an eye on. We’ll keep you updated on this one but I thought it was good to put some numbers on it from last year and where we kicked off 2025.
Slide 5 (03:56)
Moving on to money market assets, we all know they’re at historic peaks. Got some requests for this slide to update it. We’re almost at seven trillion at the end of December in money market fund assets. You can see where that was just a couple years ago during the pandemic peak was about 4.8 trillion. Actually, if you look, we probably should have put this number in here, back at the end of 2018, it was down to three trillion in money market assets back in 2018. So it’s more than doubled over the last six years which is pretty amazing when you think about it. Just haven’t seen this type of ramp-up in assets in money market funds in such a short period of time. On the right side, we have stock market performance at those various peaks. I’ve heard this was mentioned from several folks internally here at BlackRock that if you do get a period where money market or interest rates start to come down, which they have with the Fed lowering short-term interest rates, that maybe some of these dollars start to make their way back into portfolios whether that’s either on the stock or the bond side could be supportive of prices across portfolios, whether it’s the stock or the bond side. That’s certainly been the case historically. The one caveat I would throw out there, especially on the stock side is that the periods that you’re looking at, valuations were very different in the stock market so you think back the end of 2003 was the end of the tech bubble. So valuations were super cheap. You had three years in a row which stocks lost money. 2009, of course, was peak global financial crisis or the very bottom of that market so certainly fear and uncertainty was super high. Similar with May of 2020 with the pandemic but you did see assets come out shortly after that and you can see what stock returns were on the right. But again, very different valuation. World stocks are not nearly as cheap today. They’re in fact expensive. But we also know those valuations tend to be a bad predictor of performance in the short term. So, I thought this was a good update but I want to make sure, folks, keep in mind that each of these periods are different and unique and certainly the valuation story is different.
Slide 6 (06:12)
Moving on to real yields on bonds, this is something we’ve touched on quite a bit lately in Student of the Market when we talked to our fixed-income folks. This is something they’re highlighting that real yields on bonds are as attractive as they’ve been in probably a decade and we changed this one a little bit. We just looked at the five-year treasury so just moving down the yield curve a little bit, so shorter maturity and very similar story. It came down a little bit here in January but you can see real yields still over 1%, 1.4%, the highest it’s been since February of 2015. And you can see on the right side, we just defined this a little bit more precisely. You can see that returns for bonds really line up symmetrically, not perfectly of course, but line up symmetrically with where real yields start. So you buy real yields, the more attractive, those inflation-adjusted interest rates and income is, the better your return over the next 12 months for bonds and fixed income. I think that’s intuitive for a lot of bond investors, but I thought it was interesting to put some money numbers to it. You can see we’re right in between that 1% and 3%. Of course, you get above 3%, those are glorious returns for bonds up over 11% on the right. You buy bonds with real yields less than 1% of course a lot of those were negative here more recently obviously during the period from 2001 into 2021 into 2022 and ’23, the worst period ever for bond investing and it was all because real yields on bonds were deeply negative when we had that spike in inflation starting from a very low interest rate base.
Slide 7 (08:01)
Moving on to the correlation story, we’ve touched on this quite a bit in Student of the Market but you can see where the updated numbers are right near those historic highs just on the pure correlation number at 0.72 at the end of January, much higher than we’ve ever been historically again going back to 1926. This of course is the story where stocks and bonds move in tandem more so when that number is higher. So the fact that stocks and bonds are just moving together, they’re not zigging while the other one is zagging is certainly a challenge. We highlighted some of the four categories on the right that have produced some of the lowest correlations. So just looking at the mutual fund categories with the lowest correlation to stocks, on the right you can see systematic trend, very low correlation but not much return. We put the box in there because I think it’s one thing to talk about correlation but you can’t leave out the return part. Equity market neutrals, one, that’s done a really nice job delivering the second lowest correlation of any category but actually delivering some nice returns at 7.5% per year over the last three years. That’s the type of story we like to see diversification, no correlation with stocks but also delivering a return well above cash.
Slide 8 (09:18)
Diving a little bit deeper on the correlation story, we’ve highlighted this stat that’s gotten a lot of attention that the last 14 times stocks have lost money, bonds have lost money as well on a monthly basis. So you can see all the months, we had three months in 2024 where stocks lost money and you can see bonds were down as well. Even some of the months like October, bonds were down more than stocks which I think would surprise a lot of folks. So this is something that’s never happened to this degree in history. You can see on the right side that we took the longest streaks, monthly losing streaks, where stocks lost money, bonds were down as well. This goes again back to 1926. You can see 14 is by far the longest streak. The previous other longest streak was only six months in 1993 and 1994 and actually, if you combine March right in the middle there, March of 2020 and September of 2021, 19 of the last 20 months in which stocks lost money, bonds did as well. So again, the correlation numbers are high but when you look at it on this monthly basis, we’ve never seen anything close to this where stocks and bonds are moving in tandem to this degree really pushing on that diversification story. Bonds then struggled from return standpoint but the fact that they haven’t zig while stocks have zagged has made the overall portfolio even more challenging in this environment.
Slide 9 (10:51)
And of course, the solution continues to be some of those alternative pieces that we highlighted on the earlier slide. Here’s what they’ve done in those 14 months. Look at some of these alternative categories again, equity market neutral floating right to the top up 0.6% in those months, those 14 months where stocks and bonds have lost money. Certainly, that’s the type of diversification you’re hoping for in a portfolio. Some others multi-strategy global macro also on the positive side. To balance it out on the right, just wanted to show you that, hey, of course stocks and bonds when they do bounce back tend to be up more than some of these alternative strategies but I think it’s easy to see the diversification benefits. When you look at this slide, equity market neutral delivering nice returns even when stocks and bonds have been down in recent years.
Slide 10 (11:44)
Last slide just shows the longer-term view here on some of these categories in a high or low stock and bond correlation world. So just looking at the three-year rolling correlation data on stocks and bonds and dividing it really in half right around 0.5. So anything higher than 0.5, you can see that high correlation story alternatives have delivered their best performance and returns are much lower for these alternative strategies when correlations for stocks and bonds are lower. So what we’ve seen here recently pans out over longer periods of time when we get high correlations generally these alternative strategies have delivered better returns and part of the reason why that is, is that when cash is higher, these alternative strategies tend to benefit from higher cash positions and higher interest rates on cash and that results in better returns and that often happens in a high correlation world between stocks and bonds.
Slide 11 (12:45)
So, hopefully that was helpful. That does it for us for our February 2025 BlackRock Student of the Market update. As always, if you have thoughts or comments on content, you can submit that through our website. If you’d google BlackRock Student of the Market, you could submit those there. We appreciate that. As always, thank you for listening and we’ll see you next month on BlackRock’s Student of the Market update.
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