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Welcome, everyone, and thank you for joining me. I'm Mark Peterson and this is our May edition of Blackrock Student of the Market, where we step back from our daily headlines and focus on what markets are actually telling us. Over the last few months, investors have been dealing with an avalanche of geopolitical headlines, concerns around rising oil prices, of course, one of the big ones, also a big rebound in April for US stocks.
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Record highs again and record low consumer sentiment. Today's goal is simple separate noise from signal. Look at history and understand what this environment may mean for portfolios going forward. We have a packed agenda. We're going to start on the equity side. April was a standout month for US stocks. So I want to put that in historical context for you.
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From there, we will tackle one of the most common questions investors ask this time of year. Should we sell in May and go away. We will look at what the data actually says. Then we'll talk about all time highs. The market's been hitting new records and I know many investors get nervous when they hear that. I have some compelling data to help reframe that conversation.
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On the behavioral side, we have two powerful contrarian indicators right now. Consumer sentiment is at historic lows. And bond fund flows were significantly outpacing stock fund flows in the first quarter. Both of these historically have been bullish signals for for equities. And I'll walk you through the numbers. We'll also look at what's happening with the magnificent seven stocks a leadership story is shifting in 2026.
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And that has real implications for portfolio positioning. Then we'll cover an important nuance in emerging markets. Not all emerging market indices are the same. And the difference matters more than you might think. On the fund side, I want to highlight the fastest growing fund categories because they tell us a lot about what investors are demanding right now, and we will close with a framework for thinking about bonds and starting yields that is useful for investors who are sitting in cash.
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So let's get into it. Let's start with the big narrative, the big headline. April was the best month for U.S. stocks since November 2020. The S&P 500 returned 10.5% in a single month, which ranks as the 14th best month, going all the way back to 1950. That is 14th out of 916 months. So we're talking about a truly exceptional month.
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Now, here is the part that matters for investors. When we look at the previous instances of months, the strong the 15 best months since 1950. The average return over the following 1212 months was a positive 17.6%. You can see the full list on the right side of the slide. Of course, there are exceptions. March 2000 was followed by a -21.7%, and November 1980 saw a decline as well.
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But the majority of these strong months were followed by continued strength. I also want to draw your attention to the year to date return tables at the bottom. Emerging market stocks led the way in April with a 14.7% return. And international developed markets were up 7.5% year to date. Emerging markets up 14.5%, with international stocks up 6.1. And U.S. stocks are up 5.7%.
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This is really important point. Emerging markets stocks are off to one of their strongest starts relative to U.S. stocks in years. After a long period of U.S. stock dominance, this is exactly the kind of data that can support the case for emerging market diversification. Moving on to market seasonality, one of my favorite topics. It is May, which means our investors are going to ask you about the old market Wall Street adage, sell in May and go away.
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So let let us look at what the data actually tells us. On the left side you can see the historical averages going all the way back to 1926. The November to April period. What we call Turkey to tax has historically returned 7.4% on average, compared to 4.5% for the May to October period, or what we call mummies to mummies.
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So there's a historical seasonal pattern. And midterm election years specifically, the gap has been even wider 13.7% versus just 1.9%. But here's where it gets interesting. Look at the right side of the slide, which shows over the last ten years, the pattern has been much more mixed. In 2025, the mid-October period returned 23.6% in October. In 2020, it was 13.3%.
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In 2024, it was 14.1%. On the flip side, Turkey, the Sax period actually lost money in 2019, 2020 and again in 24 and 25. So what should we tell investors? The seasonal pattern is real. When you look at it, the long term averages. But it's been unreliable in recent years. And importantly, the cost of being wrong is high.
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If an investor is sold in May of 2025 and waited until November, they would have missed the 23.6% gain. The next slide addresses one of the most common fears I hear from investors. They're worried because the market is at all time highs. They feel like they it has to come down. So let's look at the evidence on the left side.
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You can see every year since 1986 and how many trading days the S&P 500 hit a new all time high. And what jumps out immediately is that record record highs are not rare. They they are normal. Since 1986, the S&P 500 has hit at least one all time high and over a third of all calendar months. In 2021 alone, there were 70 new all time highs.
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In 2024. There were 57. So far in 2026, we've had 11. There's a great stat at the bottom of the chart. Since 1986, one third of the months have had at least one calendar day that achieved a record high. Record highs are a natural feature of market. The trends upward over time. Now look at the right side of the data.
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This is the data point that really matters when we compare forward performance. After the market hits a record high versus after a non record date, the returns are virtually identical. If anything, they're slightly favor investing after new highs. One year forward returns averaged 12.5% after a year after a record high compared to 12.4% after a non record high date over three years.
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It's 11.7 versus 11.1% annualized, and over five years 11.6 versus 10.6. The takeaway is clear, and you can deliver it to investors with confidence. All time highs are not a reason to sell. They're not a signal that the market is overextended. Waiting on the sidelines for a pullback is historically missing out on returns. The market climbs a wall of worry, and investing at new highs could have produced outcomes that are just as good or better than investing at any other time.
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Now let's shift to behavioral side of the market, because this is where it gets interesting. Consumer sentiment as measured by the University of Michigan survey, has fallen to an all time low, driven by a combination of war, oil prices and an unprecedented gap in sentiment between political parties. But there's an important nuance here, and I want you to look at the chart on the lower left.
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The partizan divide in and sentiment is the widest it's ever been. Republicans reporting a reading of 90.4 quite optimistic, while Democrats are 32.5, which is the lowest of any political party on record. So the headline numbers pulled down by the extreme polarization politically and how people feel about the economy rather than the broad based economic deterioration. Now, here's a key insight.
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This is and this is on the chart on the right that investors want to focus on. Historically, when consumer sentiment is this low, it's been one of the most reliable bullish signals for stocks. Look at the previous instance in 1980 when the sentiment was at 51.7. Stocks were surged 25.2%. Over the next year, October 1990, sentiment was 63.9.
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Stocks gained 33.5%. November 2008 sentiment was 55.3. Stocks returned 25.4%. August of 2011 sentiment 55.8 stocks gained 18th June of 2022. Sentiment was a 50 stocks return 19.6 the average one year return. When sentiment has been below 60 is 17.7%. The logic is straightforward when everyone feels terrible about the economy, that pessimism is probably already reflected in stock prices.
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The bar for positive surprises is low, and markets tend to recover from there. This is one of the most powerful data points you can share with an investor who is feeling anxious about the markets right now. Let's show you another contrarian indicator that reinforces the same message. This chart tracks the difference between bond fund flows and stock fund flows over time.
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When the line is above zero, more money is flowing into bond funds and stock funds. When it's below zero, stock funds are getting more inflows. In the first quarter of 2026, bond inflows exceeded stock inflows by $134 billion. That is 248 billion into bonds versus 114 billion into stocks. Investors are voting with their feet and they're moving towards perceived safety.
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Now look at the table on the right. Every time we've seen this kind of imbalance where bond flows significantly exceed stock fund flows, US stocks have delivered strong for returns. The average one year return across these instances is plus 26.1%. The standout is March of 2009, when the gap was $130 billion in stock. Proceeds proceeded to return nearly 50% over the next 12 months.
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September 2020 the gap of $368 billion saw stocks return 30%. June of 2020 stocks returned 40.8%. The pattern is consistent when investors are crowding into bonds and shunning stocks. Equity forward. Forward returns have been exceptionally strong. I want to be clear this does not mean bonds are a bad investment, but it does suggest that investors should think twice before reducing their equity exposure at a time when the crowd is already positioned defensively.
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The herd has historically been wrong at these extremes. Let us talk about The Magnificent Seven, because the story here is changing in a meaningful way. On the left chart, you can see the cumulative returns for the for the Magnificent Seven as a group versus the other 493 stocks in the US. In the US stock market or the S&P 500?
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In 2023, the magic seven returned 112%, while the rest of the index returned 24%. In 2024, the gap narrowed 61% versus 20.1% in 2025. It narrowed further 22.7% versus 15.2, and now 2026. Year to date, the script is flipped. The magic seven are up just 1%, while the other 493 are up 8%. The table on the right tells the individual stock story, and this is where the dispersion is really striking.
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In 2023, all seven stocks outperform the S&P in 2024, six out of the seven did in 2025, only to beat the index. And so far this year, just three are outperforming. Look at the range this year. Alphabet is up 23%. Amazon is up 14.8. Nvidia is up 7%. But on the other side Tesla is down 15.1 Microsoft down 15.
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Met is down 7.2. These are massive divergences within the group that many people still think of as a monolithic trade. The implications for investors are significant if they're heavily concentrated in mega-cap tech, they are taking on meaningful, specific stock risk. Market leadership is broadening, and it's a good time to consider whether your portfolio is appropriately positioned for a market where the other 493 are actually taking the lead.
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The next slide is a technical point, but it's one that can have a real practical implications for portfolios. When we talk about emerging market stocks, we tend to treat it as one category. But the two major emerging markets stock benchmarks, the MSCI Emerging Market Index and the Footsie or the F Tse Emerging index are actually quite different. And the performance gap this year has been significant.
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Year to date April the MSCI Emerging Market Index returned 14.5%, while the Footsie emerging market index has returned just seven and a half. That is nearly double the return. Same asset class label, very different outcome. The primary reason is on the right side of the slide. South Korea represents 18.7% of the MSCI Emerging Market Index, but has zero weight.
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In the Footsie emerging market index, Footsie classifies South Korea as a developed country, so it's excluded entirely. South Korea has had a strong year and a single country difference can explain the bulk of the performance gap. You also notice differences in China and Taiwan. Weightings with the MSCI index has a higher technology allocation as well, at 36.9% versus 29.3% for Footsie.
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Here is why these matter to investors the second largest emerging market ETF benchmarks so that Footsie index not out of MSCI. So two investors could both own emerging markets funds. But their actual exposure and performance could be meaningfully different. Now let us look at money, the money that's moving into the fund industry, because I think this tells us a lot about what investors want right now.
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This slide shows the five fastest Morningstar fund categories, fastest growing over the last five years, filtered for categories with at least $50 billion in assets. The number one fastest growing category is target maturity or bond ladder funds. These have grown from $2.7 billion to $63.7 billion. That's over 20% growth rate over the last five years. Number two is derivative income, which has grown from 9.9 billion to 173.6, over 16 and 100% increase.
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These two categories are both income focused solutions, and the growth is remarkable. Third is defined outcome or buffered funds, which have grown from 6.6 billion to 81.3 billion, 11 100% increase. This appeal to clients who want equity participation with targeted downside protection. Look at the yield chart on the right. The target maturity funds are averaging 5.4% yield derivative income funds and 6.4%.
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These are delivering powerful income in a way that that investors can see and feel in their portfolios. The message is clear income is king right now. Investors want income and they want it packaged in a way that, is easy to understand and implement. These are not niche products anymore. They are mainstream solutions with real scale behind them.
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I want to close the content portion of our discussion with a framework I think is incredibly, incredibly useful for the single most common fixed income question that investors get. Why should I own bonds when rates keep going up? This slide uses a simple hypothetical to illustrate a powerful point. Imagine you start at a 5% interest rate and a bond fund with a five year duration, which is interest rate sensitivity.
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We model these three scenarios. Interest rates rise by 5% every year until they reach 10%. Rates stay flat is choice number two or the third one. Rates fall by a half a percent every year till they reach zero. In the rising rate scenario, you can see that the early years are painful. Year one returns just 3% because the rate increase causes a price decline.
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But look at what happens as you move through that period. By year five, you are earning 5%, and by year ten you are returning 7.5%. This rising rates that hurt you on price are now working in your favor through higher income on reinvested proceeds. In the falling rate scenario, the opposite is the opposite. You get a nice 7% return year one from the price appreciation, but returns gradually decline as rate as you reinvest at lower interest rates.
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Here's the key takeaway. And it's right there in the bottom row. Over the full ten year period, the average total return is 5.2%. In the rising rate scenario, 5% in the flat scenario, and 4.7% in the falling rate scenario. This is a remarkably tight range regardless of what rates do over the next period, long term bond returns tend to converge towards the starting yield for investors sitting in cash or money markets right now, this is the slide that helps make the case with the yields at current levels.
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The starting point for bond returns is much more attractive than it was a few years ago. And the math shows that even if rates continue to rise, time works in your favor. The short term, paying a price declines can be more than offset by the long term benefits of reinvesting in potential higher yields. In summary, the key message for investors is to stay disciplined.
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Strong months often and been followed by continued gains, record highs and seasonal savings or savings are not reliable timing tools, and today's defensive positioning and weak sentiment have historically been constructive signals for equities going forward. With stock market leadership changing, benchmark differences can matter and income focused solutions could gain traction, making diversified portfolios balanced across region styles and high quality fixed income likely the best way to participate in opportunity while managing uncertainty.
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Markets have rarely been calm, but they often have been resilient. History has continued to reward diversification and staying invested through uncertainty. Thanks for listening. We'll see you next month. On Blackrock student of the market.
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