00:00
This is Mark Peterson with the April 2025 BlackRock Student of the Market Update.
00:04
This month, handful of things on stocks. A lot around volatility. Obviously that's the big story of late. Then we'll touch on bonds having a good first quarter, nice bounce back for fixed income. And then finish up with some alternatives, really a golden era for alternatives.
00:25
Let's begin with the first quarter. Nice start to the year for international. If you look at it compared to last year, first time in a long time that we've seen international outperform the way it did in the first quarter. Up over 11% outperforming the U.S. That's the first time we've seen that kind of outperformance since the second quarter of 2002. So that's a long time. I see other stories here. Everything that worked last year basically in reverse this year. You see fixed income on the far right side, also a good story first half of the year. Up a little bit under 3%, a nice, refreshing change, especially when stocks suffer, right. U.S. stocks down. You like to see that bonds and fixed income piece add to the mix.
01:15
Of course the magnificent seven, those seven largest stocks within the U.S. stock market, are roughly the largest seven. For the huge story the last couple years, look at the last two years. 2023, 2024, those stocks were up over 269%, on average, for that two-year stretch for those seven. Look at the rest of the market, on average, or at least the rest of the 500, the rest of the 493, only up 39.5%. And you see what's happened this year. That mag seven down over 15%. The other 493, roughly flat, just barely negative through the end of March. And then on the far right side, we just highlighted the earnings. This came from our fundamental equity team, just looking at the fact that the earnings gap between the magnificent seven and the other 493 has really shrunk. So the earnings that really drive those stock returns has really narrowed. Where the mag seven was enormously ahead the last couple years, that's really shrunk. And that's certainly one reason why we might have seen the mag seven take a little bit of a breather here.
02:30
Moving on to stock market pullbacks, had a lot of requests for information just on corrections. We just looked at the last 20 years and looked at the fact that I think we all know if you bought corrections it works out pretty well most of the time. We did highlight some of these periods went from correction to bear market. You actually had three of those happen in this case. Certainly the global financial crisis was the big one where it went right through that correction territory, all the way down to over 56% drawdown. You see that in the middle, the far left of the table on the right. And then you had some others, 2020, with the pandemic. That was a correction that went into a bear market, but you were still higher one year later. And similar story, not quite as good in the 2022 bear market, you were still negative as you cross through that 10% barrier one year later. But overall you can see the picture on the left side. Any pullback, the median return, once you cracked that 10% correction level over the next 12 months is just shy of 16%. The average is a little bit over 12. So a little bit better than average. You can see, of course, from the very bottom of all these corrections and bear markets, your returns are tremendous. Obviously that's the benefit of hindsight. But just thought it was interesting to see how some of these corrections play out. Some don’t make it into that bear market territory. You can see all of those on the far right side end up being great times to put money to work. The periods that you do end up in bear market territory really depends on how long the bear market lasts. Some bear markets, like we saw in COVID, were very short and swift, but the rebound ended up being higher the next 12 months.
04:25
Stepping ahead, looking at the next slide, recent investor sentiment. This is something that happened end of February into early March. We had some of the most bearish readings in investor sentiment. So just are investors bearish or bullish overall? You can see the bearish sentiment was pretty historic. If you go back in history, you can see that some of the largest bearish sentiments were at the end of February and the beginning of March, right up there with—look at the top one, March of 2009, right at the bottom of the global financial crisis over 70% of investors were bearish. Or periods like 1990, when you had a recession back then. Great examples of this sentiment. But we just wanted to look at what did performance look like one year later. And as probably many of you suspect, this sentiment reading can often be a contrarian indicator, meaning you're better off going the opposite way. And that's what you see on the right side. We just pulled out all of the bearish and bullish sentiments, and it's exactly what you'd expect from a contrarian indicator. The more bearish folks were, the better you did over the next three and twelve months. If the readings were the very bullish, didn’t tend to bode very well for returns. You were actually negative over the next three and 12-month period. Something to think about, especially if news continues to be choppy here. We might see this bearish sentiment continue to climb.
06:00
Moving ahead to the next slide, a request from some folks in the field. Just wanted to remind folks, especially over the last 10-15 years, been a really choppy period, especially for headline risk. I think there's always reasons to sell stocks, and we just tried to jot a bunch down here from the end of the global financial crisis. Had you invested at the end of 2008 to today, 100,000 grows to 851,000. But look at all the challenges along the way. We were probably even kind. We probably could have filled up this entire page here. But just reminding investors that really it's the long-term path for U.S. stocks and that resiliency is pretty hard to deny. Think about all of these challenges, whether it was the global financial crisis or COVID. We've had some pretty extreme and exceptional events over this period of time, yet stocks showed an amazing resiliency in the face of this. On the far right, we just added—I always think this is neat to look at it this way, is looking at if you invested right before some of the worst events in history, whether it was World War II or the '87 crash or the tech bubble or the global financial crisis, you can see the various returns had you had held until today. So obviously some of those periods are benefiting from the length of time where time heals all wounds there. But yet even have some other recent ones here. COVID, for example, right. Even if you had invested right before COVID, you're up on average from an average annual basis up over 14%.
07:40
One last thing on stocks. This is one of my favorites. If you've followed Student of the Market, you know we talk about up and downside capture, just meaning getting a chunk of the upside of what the bull market gives you, but do a better job on the downside. That's one thing that we don’t see enough of industry wide. We don’t see enough of that out of managers and strategies and asset classes. And this is an example of that. This goes back a bunch of years back to 2011, looking at the minimum volatility index. So stock index that just focuses on some of those lower risk stocks. Look at the up and downside capture tradeoff that it's delivered over this stretch. 76/68, which probably seems somewhat pedestrian, not very glamorous, I think, by most standards. But look at all the other options on the board. A lot of other strategies. Certainly international and small cap have been out of favor, but look at even some of the large cap categories, so those large company funds and ETFs out there. Look at the average up and downside capture that they've delivered. 94% upside for the large blend. So that's that large core box, the largest Morningstar mutual fund category, ETF category out there. 94% of the upside. 102% of the downside. That’s not what you want to see out of your stock portfolio. You've really got to get that right side up. Even growth that's been in favor is 102/109. That just doesn’t work over long-term time periods. So I think this is really what's missing in a lot of portfolios is just collecting a lot of these strategies, asset classes, managers that deliver a nice up and downside capture like the minimum volatility index, you can see. And on the far right side, we just tried to pull up some examples, hypothetical examples. Various bull and bear market combinations. What happens if you delivered some of this capture ratio? You can see we've got big, small, and medium bear markets in there. You get to a big or even a medium size bear market, that's when this good up and downside capture really kicks in. You can see how much the good up and down capture tradeoff outperformed in a full market cycle, in that big and medium bear market cycle. If we get a small bear—if that was the only downturn that we ever saw was a 20% drawdown in stocks like we see in that small bull/bear example, this up and downside capture wouldn’t matter as much. But it just gets amplified the larger the bear market is. So again, this up and downside capture tradeoff is something that I think we all need to embrace, not just in markets that are volatile like this, but just in long-term sound investing. Have that piece of the portfolio that gives you that level of diversification and downside protection.
10:40
Switching gears to fixed income, bonds finally zigged when stocks zagged in the first quarter, meaning that bonds were up when stocks were down. Stocks were down about 4.3%, and you can see bonds up just shy of 3% at 2.8%. It broke a streak where we had four quarters in a row in which bonds had lost money when stocks had lost money on a quarterly basis. And that's tied the longest streak in history. If you went back to the late seventies, early eighties, you had the similar dynamic where stocks lost money, bonds lost money as well. That was of course high interest rates, high inflation. So not exactly the same kind of period, but it does somewhat rhyme. And then on the far right side, we just highlighted the fact that some of the alternative categories really stepped up and delivered when you were going through this high correlation challenge between bull stocks and bonds. Look at the returns for multi-strategy, equity market neutral, global macro. Those are all broad indices and categories of these alternative strategies. They delivered when correlations between stocks and bonds were at their highest levels in history. Hopefully we've broken that. We'd like to see stocks and bonds go back to a little bit more normal correlation where you get the zig while the other zags. I think that'll probably be the case. But don’t forget about some of these alternative strategies. They're really stepping up and delivering in a big way when you need them the most.
12:08
I think one of the things, and I'll finish here, is these alternative strategies have gotten a lot better. They're in a lot better shape than they were previous years. I know a lot of advisors and investors have experience with these over the years, and probably been a little disappointed both from a diversification and an overall return standpoint. But I can tell you, they're in a lot better place today. Couple things driving that. The competition, the managers are much better, the strategies are much better, and the fact that we're actually getting some return on cash. A lot of these alternative strategies are cash plus. So when you were getting 5% on cash last year or 4% plus on cash this year, those strategies can utilize cash but also add the return with whatever strategy they're employing. You can see the difference on this chart. Look on the left side is correlation. Just how good is the diversification relative to stocks? You can see the diversification is much better. The lower the correlation number, the better the diversification. That trend has been in place pretty solidly here since 2000. And a big part of that is the fact that cash went from zero back in 2020 to the 4-5% last year that we've seen here recently. And that is why the right side, which is returns, why returns have gotten so much better for these strategies. They're not just trying to add on to a cash level of zero. You're getting some return on cash. But they can add a little bit of return above that. Really a nice story, a much better situation. I know folks who've been disappointed here need to give this area, this asset class and these strategies another look. They're in a much better place, much better position to add diversification and returns to portfolios going forward.
13:55
So that does it for our April 2025 BlackRock Student of the Market Update. As always, if you have questions or comments, you can find us if you Google our BlackRock Student of the Market page. There's a section for comments and questions. Some of the best ideas for content comes from advisors and investors across the U.S. Thanks again, and we'll talk to you next month on BlackRock Student of the Market Update.
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