Opening (00:00)
This is Mark Peterson with the November 2024 BlackRock Student of the Market update.
Slide 2 (00:06)
For November, a handful of things for you on stocks. First, we'll touch on seasonal factors. We'll hopefully have our last election slide for a while. Largest stocks also driving performance been a big issue and growth versus value. We'll move on and finish up with bonds and alternatives. Look at bond volatility and long-term interest rates and inflation. Have a slide on interest rates following a Fed rate cut, and then finish up with alternatives when correlations are high.
Slide 3 (00:39)
Let's begin with seasonal returns on stocks. This is, of course, our favorite time of the year when stocks do their best. From November 1st to April 30th, we affectionately call it Turkey to Tax. November, of course, being the month of Thanksgiving, and April normally when we do our taxes. That's where the naming convention comes from, makes it easy to remember. November 1st to April 30th, the best six months for stocks. You've averaged seven and a half percent in that six-month window since 1926. Actually, done better over the last 40 years. And the opposite six-month window, May 1st to October 31st, we call that Mommies to Mummies, considering May's Mother's Day and of course 31st of October is Halloween. That six-month is actually the worst. That's the old sell and may go away. Market adage, that's out there, but you can see the returns are still pretty darn good in that six-month window. You certainly don't want to leave 4.4% on the table. That's the average for Mommies to Mummies since 1926. You can see on the right side what's happened in the last 10 years. Doesn't work every time, but there is a little bit of a seasonal bend here towards that six-month Turkey to Tax period.
Slide 4 (01:51)
Now the election is over finally. We can move on, but I thought I'd finish up with just one more slide looking at historical election data, looking at election years, looking at years after the election, right in line with average, by the way, that first year after the election, 10.7%. So, right in line with average, a little bit less than an election year. It's those midterms that are a little bit more challenging. And year three, actually, the year before the election is actually the best up 18%. And you can see the last two months of the year tend to be pretty good. If you annualize that out, that's over 12%. So, I think that feeds into that little Turkey to Tax period as well. You get November, December. After an election's over, usually pretty good for stocks.
Slide 5 (02:37)
Now, of course, largest stocks have been driving index returns. The Mag Seven, right? Certainly, the Apples, Microsofts, Google, Amazons, Teslas of the world, NVIDIAs. They've been driving the performance of the market again this year. Not nearly as dramatic as last year. You can see last year; they were up 111% on average. This year about 41%. So, you can see the drop-off is much less than last year, but still there. And I put in valuations. I've been getting this question quite a bit. Just what about the valuations between the two? But median valuation certainly higher, especially in the top 20 stocks. You know, once you get to that bottom, 400 stocks. You can see on the far right the median price earnings ratio is about 24. Very different than 37 at the very top. So, I thought that was interesting. Clearly, a break between the broader market from a valuation standpoint and those top seven or top 20 names.
Slide 6 (03:34)
And of course, that leads us to growth and value on the next slide. I think one of the big stories has just been the historic growth outperformance. And we did this on a two-year rolling basis. That really looks at, I think that's captured some of the swings here in growth and value the last handful of years. You can see had a big swing post-December of 2020, you know, which was almost as big as what we saw back in the Tech Bubble on a two-year rolling basis. And you can see, obviously, when you've had some big historic swings to growth, the opposite's been true too, where you've swung back towards value the next couple years. So, you can see what happened value outperformance on the right side of the slide, following some of the historic periods. So, this would be the third highest period ever. Clearly, some room though between where we're at, 16% of average annual outperformance where you had over 23% back in December of 2020 or 26% in the Tech Bubble in February 2000. But something to keep an eye on. I think our folks are a little bit warmer to value, certainly not overweight value.
Slide 7 (04:51)
Switching gears on the bond side, we actually updated this chart that looks at how many bond days that you have that are up or down by a half a percent or more. So, anytime the core bond index is up a half a percent or more on a given day or down by a half percent or worse on a given day, you can see we've had 24 so far this year through the end of October, off the pace of last year and 2022. Look at all the volatility in bonds that we've seen really the last two and a half years here have been pretty dramatic and really out of lockstep with history. You can see we had 45 back in 2008, but the average is about 15 a year. So, we're well past that pace. We'll probably get a handful more between now and year end. So, higher volatility, but it has come down versus what we saw in 2022 and 2023. And of course, similar to stocks, very similar story. Less volatility is better for returns on the bond side, not nearly as dramatic as what we see on the stock side but certainly a lean towards better bond performance if you have less volatility in daily returns. So, I thought that was interesting. Again, you look at some of these periods and obviously, some of the volatility are around periods where the economy is really figuring out where the... Or excuse me, the market's trying to figure out where the economy is headed. That's when you see more volatility both on the stock and the bond side.
Slide 8 (06:18)
Inflation below long-term interest rates has been the case now for several months. We're down to 2.4% on the headline inflation number. Long-term interest rates have bounced back here about 4.3% at the end of the month, drifting a little bit higher here in November. And this is generally a good position to buy fixed income whenever your yield is above inflation. The old classic real return argument, you're giving a real return of above inflation. Look at the returns on the right. Anytime you buy when 10-year treasury yields are above inflation, look at the return for that core bond category, 8% over the next 12 months. Whereas if you buy when inflation is above interest rates, that really wipes out your return. All bets are off. So, I thought that was interesting. Just the backdrop for one, the reason why we like bonds and fixed income at this point. Real returns are good. You're getting almost two percent above inflation. History tells you that's a nice time to own bonds and fixed income.
Slide 9 (07:28)
Now, interest rates have drifted higher here since the Fed cut interest rates back in September, on September 18th, lowered by 50 basis points. We think we'll get another one here in November. Maybe one more in December. But we have interest rates backed up but if you look at when the Fed lowered interest rates, lowered that Fed funds rate, the 10-year treasury was at 3.7%. Like we said, we're up over 4.3% today. So, I wanted to look back historically. And it's not unusual for interest rates to back up, actually, after a Fed rate cut. It doesn't happen every time. You can see three out of the last five times, rates have actually backed up or stayed the same one month later following a Fed rate cut. You can see what happened three months and one year later. I thought it was interesting that a lot of times, the good news from a rate reduction standpoint gets baked in by the time the Fed actually lowers rates. And again, kind of backing up what we saw in the previous chart, when the Fed makes its first rate cut, not a bad time to own core bonds historically. We've had a little rough patch here to start, but when you look historically, you've averaged about 7.2% one-year returns following the first Fed rate cut.
Slide 10 (08:46)
Last slide, one we ran earlier this year. I thought we'd update it, especially because we're still at record high correlations on stocks and bonds. So, if you just look at the three-year correlation for stocks and bonds, it's 0.71, which ties the highest ever for traditional stocks and bonds. So, it's really led a lot of advisors that we talked to to the alternatives category. You're actually getting some nice returns on some of these alternative categories. And they tend to do well when correlations tend to be high for stocks and bonds. We just ran a clean breakdown since 1994 of what happens when correlations are lower, 0.5 or less between stocks and bonds. What were some of these alternative categories returning over a three-year window? And then, what happens when correlations are high? And you can see the returns on alternatives tend to correlate with higher correlations. So, some of the thought we have here is the returns are better for alternatives because cash returns tend to be better in a high correlated world. These funds utilize cash as a part of their strategy, their... excuse me, cash plus strategies. So, when correlations are high, usually yields on cash are higher. That bodes well for better returns on these alternative categories. That's exactly what we've seen recently. So, whether it's equity market neutral, some multi-strategy or global macro, these tend to be in a good position when cash rates are high. And even as the Fed lowers rates, right, we'll still have decent returns on cash going forward. So, these alternative categories seem to still have the wind at their back. From a high correlation to stock and bonds, high return on cash, backdrop bodes well for returns going forward.
Closing (10:41)
So, that does it for our November 2024 Student of the Market update. As always, let us know if you have comments or questions. Love suggestions from advisors across the country. Some of those questions and ideas make up the best slides. We'll see you next month on BlackRock's Student of the Market update. Thank you.
