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Welcome, everyone. And thank you for joining me. This is our April Edition of Student of the Market for Blackrock, where we step back from the daily headlines and focus on what markets are actually telling us.
Over the last few months, investors have been dealing with geopolitical tensions, election year uncertainty and a noticeable pick up in market volatility. Today's goal is simple celebrate the noise from signal. Look at history and understand what this environment may mean f-or portfolios going forward.
Here's how we'll walk through today's discussion. First off, geopolitical volatility is obviously dominating the story in how markets have behaved around major events. Then we'll look at market drawdowns and see what history says about recoveries. We'll update you on volatility, our favorite 2% trading Day stat. we'll look at Midterm election years as we get closer to that November event. Earnings estimates in the first quarter were really good, but markets were down a historically odd combination. We'll update you on International stocks that are still leading so far this year. We'll look at what percentage of asset classes are negative as well. And then finally we'll finish up with income oriented asset classes along with alternatives. How they can improve diversification. Especially on the bond side.
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Let's begin with the first slide on geopolitical volatility. The slide puts some much Needed perspective around geopolitical risk. We ran something similar last month. The headlines can feel alarming wars invasion, terror attacks. But history tells us something important.
Markets have generally absorbed these Shocks better than I think most Investors expect. The table shows returns for various asset classes, including gold, oil, fixed income and stocks before and after major events going back decades. While markets often dip initially when you zoom out to a year after the event, stocks have frequently recovered, in many cases posted solid gains.
The takeaway here isn't Geopolitical events don't matter, it does, but timing markets based on headlines Historically been a poor strategy. Long term discipline has mattered far more than predicting crisis Impact.
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The next slide is one of my favorites. From a perspective standpoint, it ranks the US Stock market years by how bad their worst drawdown was during the course of the year. And then shows where the markets finished up, for that given calendar year. right now the market's down about 9% from its peak historically when drawdown stayed below 15%. Stocks have not finished the year Negative. And that's almost over a 100-year period that we have good data.
On the flip side, once drawdowns exceeded 15% the odds of a down year rose to about 60%. The message here isn't predictive. It's contextual- drawdowns are uncomfortable, but they're also normal. What matters most Is not the drawdown itself, but how severe it becomes.
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Stepping ahead to market volatility. Despite everything happening geopolitically Market volatility has been fairly mild. We've only seen two days with it Plus or -2% trading moves so far this year through the end of March. We did get One in early April, so we're up to three.
It's always the case when we update the slide that the market's always going to throw one at us. So we're no longer updated. But not surprisingly, years with fewer volatile days often deliver stronger returns. You see that on the right. Then some of those higher volatility years were returns can struggle doesn't mean just because you Have higher volatility that the market will be down but that's certainly where history bends.
So volatility grabs attention. But really what it tells us Is how the market is feeling about the economy. Look at some of the years with the most 2% trading days. Those were periods that were there was a lot of concern about where the economy was headed. Think about 2008 when we had 72 days + or -2%. There's only about 252 days a year the market's open. So that's one every 3 or 4 days you're getting a 2% move. So the market may be telling us that it believes the economy is on good footing now, even with all the dramatic headlines.
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Moving on to earnings and stock returns, this slide highlights something unusual in the first quarter, earnings estimates rose sharply yet stock prices Fell. That disconnect is rare historically when earnings were rising. But stocks declined in the quarte the one-year average for return is, about 15%. You see that in the bottom right-hand corner.
Now that's not a guarantee, but it does suggest that periods like this have often been opportunities rather than warnings, especially when fundamentals remain intact.
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Stepping ahead to midterm Elections- elections tend to make Investors nervous. Midterms included. Historically, the first three quarters of midterms have been very sluggish, followed by a very strong fourth quarter after election uncertainty clears. You see that right before and within the fourth quarter, the market rallies after the midterms are over.
And remember, the last two midterms, the market was Down, in 2022 and 2018. 2022 down 18%. Historically, we have never had three midterm election years in a run which we've Lost money. We've had two other where we had two years in a row. Hopefully we won't, break that record this Year.
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Now broadening out to asset Class returns in 2026. The next slide Shows how the percentage of Asset classes, that lose money in a given year. And we're defining asset classes using the Morningstar category average, which there are a lot of -- over 120 so far this year returns have been More constrained. Meaning fewer categories are posting positive gains. Actually, 57% of lost money. Notably, alternatives and commodities have helped support positive performance. That's where most of those positive categories are.
Interestingly, in 2005, we saw Extremely broad gains only 2% of categories lost money. If you look over time, it's Not unusual to get a year in which lots of categories lose money. Nothing works in a portfolio. But those years have been followed by periods when everything starts to work in the portfolio again. Today's environment is more challenged, underscoring why diversification matters more than ever.
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International stocks on the next slide continue to lead in 2026. Although we gave some back here in March. But international stocks not just over the one year or the year to date period, but also the one year period outpacing the US. Longer term U.S. stocks when they deliver Lower returns below 6% over a ten year window. International stocks have outperformed 95% of those periods. So whenever US stocks struggle, international really delivers from a diversification standpoint, this reinforces the case for global diversification. Especially when US leadership narrows or pauses.
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Moving on. One of the last slides Here. income and alternatives boosting fixed income. This one highlights one of my favorite statistics up and downside capture of an asset class versus US stocks. In this case we look at, bonds. This tells us how much an asset class historically captures in a good market, and how much of the downside it has in a bad market.
Importantly, investors want Asset classes that have a positive up and downside capture profile, meaning the upsides greater than the downside capture. A positive capture ratio adds a lot to a diversified portfolio, improving the risk return trade-off. For decades, you can see bonds up and downside capture was perfect. Benefiting from falling Interest rates. That tailwind is largely behind us. As a result, traditional core bonds now have less attractive Open downside capture versus stocks. Though that relationship has started to improve as we reset interest rates higher.
What's changed is that income orientated asset classes and alternatives like multi-sector Nontraditional bonds, liquid alternatives, deliver better up and downside capture profile. The message isn't to abandon bonds, but broaden how we think about diversification and risk management.
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In summary. We discussed how political, geopolitical volatility Has historically been absorbed by market annual drawdowns under 15% of typically not led to negative year end return. Mild or Market Volatility signaling economic confidence, an unusual disconnect between earnings rising estimates and falling Stock prices, which is historically preceded gains.
Outlines the midterm election year stock performance a strong fourth quarter emphasizes the importance of diversification and varied asset class returns, with international stocks Leading in 2026 and in the, the growing role of income orientated and alternative strategies and seeking enhanced portfolio risk and return profiles in a shifting market environment. Markets rarely remain calm, but they often are resilient. History has rewarded diversification patience and staying invested through uncertainty. Thanks for Listening. We'll see you next month on BlackRock's student of the market.
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