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Opening (00:00)
This is Mark Peterson with the January 2025 BlackRock Student of the Market update.
Slide 2 (00:08)
This month, we've got a handful of things on stocks wrapping up 2024, another great year for U.S. stocks. Then we'll move on to bonds, not as good on the bond side. We'll talk about how active fixed income actually added a lot. We'll touch the economy and then finish up with a story on diversification that we always love, winning more by losing less.
Slide 3 (00:30)
Let's start with 2024 for U.S. stocks, another great year for U.S. stocks, up 25%, and really like this chart that categorizes calendar year returns for us stock. So, you can see the various levels, and certainly, no precision to this, just kind of group them by various levels of return with the bear market years on the far left, years where you lose money slightly to the right of that, and then probably most interesting is right in the middle. Look at the average return for stocks, is right around 10.4% historically, but rarely these stocks finish the year around that average. So, anywhere between 8-12%, you've only had six of those calendar years going back to 1926. So, almost 100 years of data, yet, you've only got six years that finish right around that average, but look at the far right side. This is probably the most compelling thing about this page, is you've had 38 great years. So, by far, the biggest column is years in which stocks are up more than 20% in a given calendar year. I think that's tremendously compelling. You just need to hang around for those great years. That's what works. That's what makes stocks move and gain and build wealth over time, is sticking around, weathering some of the storms on the far left of this page. The fact that stocks rarely finish around average, but if you hang around for some of those great years, that's how you build wealth over time.
Slide 4 (02:01)
Moving on, the fact that we've been up 25% or more the last two calendar years is pretty historically rare. You can see on the right side, it's only happened… this is the fifth time. So, four of the times, historically, you had several in the Great Depression era. So, ’27, ’28, ’35, ’36. Obviously, those ran into some bad years, but more recently, you've actually had better outcomes in that third year. So, you can see ’54, ’55 were great performance years, and in ’56, you were positive, but not… you know, well below average at 6.6%. More recently, ’97 and ’98 were greater than 25%, and then ’99, you were up over 21%. So, certainly, a lot of follow through during that period. Great question, what does that mean for 2025? Stocks certainly aren't cheap, but we're still leaning into stocks at this point. We think a lot of the fundamentals still support the case, and we think maybe the history looks a little bit more like what we saw in the 50s, or more recently, in the 90s, where stocks continue with their momentum.
Slide 5 (03:07)
Stepping ahead to the next slide, we've touched on this last month and several times in previous issues, is just the fact that the diversified portfolio, a stock and bond mix, is trailing the U.S. stock market, which is natural, of course. We all know that intuitively, and it's even worse if you add some other diversifying elements, like small company stocks or international stocks as well. This gap even grows even more. So, we've affectionately named that S&P Envy. So, just the gap between the diversified portfolio and S&P Envy is pretty wide over the last couple years, and I think that causes some frustration out there. Even though they've been good years for diversified portfolio, double-digit returns, the fact that you've made a lot more if you've just owned U.S. stocks can be a somewhat frustrating feeling for investors, and we call it S&P Envy because it's natural. I think folks need to understand it. We put it on the right side, just the largest years ever, where you get a big gap between the diversified portfolio and U.S. stocks. Again, we just, for simplicity, used a simple 60% stock, 40% bond mix, but obviously, if you have some of those other diversifying asset classes, you're probably down, even the gap might even be a little bit bigger, but you can see it's a natural thing. You can see it happened. 2021 was even bigger from an S&P Envy standpoint. Just thought it was good to remind folks that, hey, this happens. You know, this is pretty wide this year, but this is only the eighteenth largest S&P Envy gap that we've seen since 1926. Again, almost 100 years of data and really outlines that this is a natural thing. It happens. We need to stick with the plan, right, and we'll touch on that with the final slide on winning more by losing less.
Slide 6 (04:58)
I mentioned the bull market length. I think this is one of the most convincing cases just for where we're at in the cycle. The fact that, yeah, we've been up 25+% the last two years, but if you look at the bull market, the length versus average, normally, bull markets average about 55 months. So, pretty good over the… that's a median, actually, since 1926, and you can see that the average return is over… normally about 200%, 202% to be exact. We're only up about 74% in this cycle. So, it's still pretty young, still some ways to go versus the historic average. Of course, valuations aren't cheap, but maybe the market might broaden out a bit, and you might have some of those stocks that haven't carried the weight of return start to carry some of their weight and add to return. So, a broadening of the market, some of those smaller company mid-cap company stocks might do a little bit better. Not something we're jumping on the bandwagon at this point, but you might see that at some point here in 2025. Something to keep an eye on.
Slide 7 (06:02)
Switching gears on the bond side, that'll be interesting, just to lay out the slide, looking at the same type of calendar year return pattern that we looked at for stocks, but the pattern is very different here. So, just looking at various levels, of course, you have the one bear market year for bonds down over 13% in 2022, not too far in the past. Reminds us how difficult that year was and how historically rare it was. This year, we were up 1.3% for that core bond index. We gave up a bunch the last couple months, as interest rates drifted higher, but you can see. it's very normal for bond returns to be right in the middle, anywhere between 0 and 7%. That's where 59 out of the 99 years sits, right in the middle there, and that's one reason why bonds in a portfolio make a nice balance or ballast, is because they provide that predictability and that level of return that's a little bit more stable than what we saw on the stock side, where you see a little bit more at the extremes on both sides of the chart. So, I thought it was a nice contrast. I think it's a great way just to compare and contrast bonds and why they work well traditionally in a portfolio, and you can see the longer-term average in the black box. Bonds average about 5%. So, that's certainly something we're shooting for, for this year. They tend to gravitate towards where interest rates start, and we're right in the high fours on a ten-year U.S. treasury bond. So, that bodes well for better bond returns in the future.
Slide 8 (07:36)
The next slide shows how active fixed income has played out here, really, over the last couple years. You can see, going back to October of 2022, when we reset interest rates, the ten-year U.S. treasury, again, reset to over 4%, and look at how we've been in a trading range, really anywhere between 3.2% back in April of 2023 to 5% in October of ’23. We've kind of bounced around right in between. So, rates actually haven't gone very far. They've gone a little bit higher since October of 2022, but not much, but look at the dramatic swings in fairly short periods of time. I think it's one of the most interesting things folks haven't talked about, and you can see on the right, we just put the return for some of the categories, how active managers have actually been able to play this pretty well, whether it's adding to higher income producing bonds, some of those spread sectors that have performed better, given you a little bit more return, have been a little less interest rate sensitive. That's been better performers in that multi-sector bond space, or certainly, something for us, a big category is that non-traditional bond category, adding a lot of value above cash and at core bond index as well.
Slide 9 (08:52)
Moving on to the economy on the next slide, this is always one I like to keep out on the desk, just to remind ourselves what's the economic cycles look like, just from an economic expansion standpoint or a recession. What do they look like historically? Of course, we had one of the… we actually had the shortest recession on record, that pandemic recession in March and April of 2020, and you can see how rare that was, only two months long, very severe, but very short, and you can see now the recovery. We're at 57 months. So, closer to the average, historically, you can see the average going back to 1927 is about 61 months. So, a little bit over five years, but I think more interesting is look at the bottom left hand corner. We just highlighted that, really, since the early 1980s, the average expansion has lasted closer to 100 months. So, almost not quite twice as long as the historical average, but I think this is how the economy's evolved a bit, where we're more of a service economy today than we've been in the past. So, we don't have some of the extreme economic cycles that we had when we were more of a manufacturing economy, more of a boom and bust cycle, and you'll hear that from a lot of folks, and I think you see that, just in the fact that the economic expansions have not been quite as dramatic. Of course, the exception, you know, at least on the recession side, was the global financial crisis in ’07 into ’08 and ’09, but I think you see the economic expansion, especially on the left side, tend to last a little bit longer, and again, at 57 months we're all, you know, you're only halfway into what's been a typical cycle since the 1980s,
Slide 10 (10:39)
and finally, our winning more by losing less story is all about diversification and why it still makes sense, really pairs well with that S&P Envy slide that touched on earlier, the fact that you get frustrated by the fact that your portfolio might not be keeping up with the overall U.S. stock market, but this just looks at, really, the period starting with the global financial crisis, and on the left side, you can see 100,000 has actually grown to about 530,000. So, not too shabby, considering you got three bear markets in there. You have the global financial crisis, you have 2020 in the pandemic, you have 2022, when the Fed was raising interest rates, and inflation was a challenge, but you've still grown to over 530,000 over that stretch, I think, is pretty impressive, but on the right side, we just look at the simple mathematic reality, that if you captured 83% of the upside of all those bull markets on the left, but also, the same ratio on the bear market side. So, you've protected better on the downside. So, you got less upside in a bull market and less downside in a bear market. Look at what happens to your overall outcome. You actually end up in a slightly better spot, $531,320 versus $530,245, not an enormous difference, but you've actually better return, better overall outcome, with less risk along the way, I think, is super compelling, and you can see at each stop along the way. You're actually higher on the right side of the page. You've limited the downside. You've got a chunk of the upside, but not all of it, and that's allowed you to win more by losing less, ends up in a better outcome over time. I think a great reminder for some of those folks who might be feeling a lot of that S&P Envy, just to say, hey, this is why we're building portfolios the way we do. This is why we asset allocate and diversify and spread your investment eggs across a variety of investment baskets. It's all to get to this winning more by losing less story. It's just sometimes tough to see when you go through a couple years like, uh, the last couple, where S&P Envy and the gap between the diversified portfolio and the U.S. stock market can seem pretty extreme. It's just part of the process, just something that happens. Again, a good reminder, I think, for all investors, even some of the best folks we work with need this reminder from time to time.
Slide 11 (12:57)
So, that does it for us for the January 2025 BlackRock Student of the Market update. As always, if you have ideas or questions on content, put that through our website. If you Google BlackRock Student of the Market, it'll pop up there, and there's a spot to add those comments, but as always, thank you for listening, and we'll see you next month on BlackRock Student of the Market update.
Student of the Market: January 2025
BlackRock’s Student of the Market provides monthly insights on current and historical market trends. Share these key insights with your clients now.
Featured Webinars for Advisors
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00:00:02
CAROLYN BARNETTE: Hi everyone. I’m Carolyn Barnette, Head of Market and Portfolio Insights for US Wealth, here with a few key takeaways from our In the Know Webinar on our 2025 outlook.
00:00:12
So, look, first and foremost, I’d say we are very optimistic for the year, particularly on US Equities. We see a lot of room for growth there. You know, Alister Hibbert, the Portfolio Manager for our Unconstrained Equity Fund, said it’s always easier to sound smart when you’re sounding bearish and talking about all the risks, but we’re not seeing anything in markets right now to suggest that bearish view.
00:00:38
If anything, to think that valuations aren’t justified, you’d need to expect profit margins to come down, and again, not seeing any suggestions that that could happen. So, definitely staying overweight equities, overweight US equities in particular.
00:00:53
On the bond side, certainly seeing some risk to longer duration assets. You did see the Fed start their cutting cycle, but you also saw longer-term treasury yields rise as the Fed was lowering interest rates with the potential for persistent inflation, with the potential high deficits. We’re still concerned about the risks involved in long-dated treasuries, and so instead what we prefer to do is really build balance into our fixed income sleeves.
00:01:24
Part of that is leaning into shorter and intermediate dated core bonds on the high quality side, and part of that is also shifting more of our fixed income portfolios towards what we call plus sectors, which could be high yield bonds, but other bonds that are delivering a spread over treasuries like securitized debt where you can get higher yields with potentially less risk and also have a nice balancing effect for your high quality bonds.
00:01:50
Last piece I’ll leave you with is we’re really optimistic about private markets going forward. We think the return in premium could go up there. We’re seeing a lot of dry powder sitting on the sides, we’re seeing valuations that might not have yet adjusted the way public market equities have, and we’re certainly seeing lower financing costs, more demand for fundraising capital as well, making us really excited about that private market space.
00:02:17
So, you put that all together into a diversified portfolio, we are at our max, almost at our max overweight to equities within our model portfolios. They can go up to 5%. They’re sitting at +4% right now. So, that gives you a sense of how bullish we are and how overweight, but still building in as complements all of those other exposures as well.
00:02:40
We’re going to be doing these In the Know Webinars on a monthly basis going forward. The next one is going to be on February 20th at 2:00 Eastern. So, really excited for that as well. Hopefully we’ll see you there, and if not, have a wonderful January, and we’ll talk again soon.
In the Know recap: January 2025
Watch a recap of our latest In the Know event where our top thought leaders gathered to share their perspectives on the market and how they’re positioning portfolios for 2025.
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