Opening (0:00):
This is Mark Peterson with the March 2025 BlackRock Student of the Market update.
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This month we'll touch on stocks. First off, a handful of things, including stock market concentration and how that is evolved over the year. Second half, we'll talk about diversification bonds and alternatives. We'll look at correlations that have been historically high and how the benefit of alternatives, including private markets helps that story.
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Let's begin with U.S. stocks in February. We were down 1.3% after being up 2.8% in January. Certainly not an unusual pattern. This is actually the best combination historically to begin a year. When you get a good January and you get some back in February, you can see that you average the next 10 months 13.7%. The best of the four combinations. Of course, a negative in January and February is the worst. You only average 6% the next 10 months. By far the worst. That negative momentum often carries through. And I think it's just good to highlight that February is actually the second worst month of the year, going back to 1926, looking at all the averages. You see that on the chart on the right, where you only average 0.4% return, you're negative actually 45% of the time, which is clearly second worst only behind September where you actually have a negative return, and almost 50% of the months in September are negative. So not an unusual thing to see the start that we've had to the year. Hopefully history will hold here and we can see some nice returns the last 10 months.
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One of the big stories that doesn’t get touched a lot is even though we've had a ton of headline news with the new administration, lots of concerns about what the impact will be on the market and the economy, but the stock market volatility has been amazingly stable. We obviously came close some of these days to a 2% trading day. If you recall, this is our favorite measure to look at volatility. We don’t look at the volatility index. That's hard to explain to an end investor. But when we do look at 2% days, any day the market is up by 2% or more or down by 2% or worse, tells the same story but in a much more understandable way. You can see this year we've had zero so far. We've been close, but still at zero 2% trading days in the stock market. Last year we had six. And the previous year, 2023, we only had two. But of course you have some of these other periods where volatility is much more the story. 46 days back in 2022, when we had the Fed raising rates and high inflation or the pandemic you had 44 back in 2020 or the peak of the period, 2008, during the global financial crisis. You had 72 days that the market was up by 2% or more or down by 2% or worse. There's only about 252 trading days in a year. So 72 out of 252 is about one every three or four days you are getting a 2% move. Certainly felt that way for those who lived through it. But then on the right, I thought it was interesting just to connect a couple things to the volatility story. Look at the return by level of volatility. So if you get 10 or more of these 2% trading days in a calendar year, all bets are off. Your returns are just slightly above zero, 0.3%. But you get some of these years where volatility is really well in the background, not an issue, you average 19, almost 20%, 19.9% in those calendar years. And then also bringing in economic growth, just wanted to look at what does economic growth look in these years when you get a lot of volatility. And as we often discuss, economic growth really coincides well with volatility. Meaning the higher the volatility, the lower the economic growth in that calendar year, and the lower volatility, the better the economic growth. 1.3% versus 3%, so pretty big gap between the two. Just highlighting the fact that when the market gets volatile, it's really concerned about where the economy is going. And I think that can tell you a lot about certainly not only the market but the economy, and also think about how this translates through to stocks. If the economy is on good footing and the market is confident, that certainly bodes well for earnings and profits of those companies, which obviously translates to prices. So thought this was an interesting view to client. Something to keep an eye on. I know there's been some recent concerns about economic growth. We've had a little bit of volatility, but no 2% day so far this year. So the market is saying that certainly things seem to be still on pretty stable footing.
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Market concentration on the next slide I think is one of the big stories of the last couple years. Just those handful of stocks at the top of the stock market driving returns up over 111% for the magnificent seven in 2023. Up 60% last year. But they're off to a slow start this year. They're actually in negative territory. But look at the top ten holdings of the S&P, going all the way back to 1970. You can see the period that we're in now, up over 30%. We're at 37%. So those ten largest stocks the S&P 500 make up, 37%. That's even higher than we were back in 1970 when it was almost 34%. So you can see just the dramatic difference over this 50 plus year period where we haven’t seen concentration in the stock market index like we are today. It can last a while. Look at back in the seventies. And I can tell you, the S&P data only goes back to 1970. But I know it was an issue in the back half of the sixties as well. So it can last a lot of years. I think that's one thing to keep in mind here. But look what happens on the right side. There's some performance. Of course if the top stocks within the index are leading the way, it's very difficult to beat the index. So you see that in years when concentration increases. This is what we lived with the last couple years, where the active manager who tends to be smaller cap doesn’t have as much concentration in their fund as the index does right now. They'll under perform in years where that concentration is going up. Same with equal weight. And I think that's pretty intuitive. But the opposite is also true. If you actually look at periods back in the early seventies, as we unwound from that really high level of concentration, you can see that active large blend equal weight had a very good return period. So when it does break, certainly the active managers that have smaller caps tend to be a little bit more diversified throughout, will benefit. And of course equal weight across the board will benefit as well as that concentration unwinds itself. So something to keep an eye on. I thought the history was good here, but again, some of these periods can last a pretty long time.
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And to build on that, we thought it was fun and I'm sure a lot of you have seen this over time. Just looking at how the top names within the U.S. stock market have evolved and changed over the year, so we started it in 1975. You can see what it looks like with IBM, AT&T, Exxon, Kodak, and General Motors being the top five. And just look at how that's evolved over the years to where we're at today where it's Apple, Nvidia, Microsoft, Amazon, and Alphabet. Just amazing evolution of the stock market. I think you can see some of these names hanging around for a while, bounce around. And then others are out fairly quickly. But I think one thing is clear is you think about where we're going to be 5, 10, 15, 20 years from now. Very likely that that top five might be completely different than what we're seeing today. Just the dynamic, resilient nature of the U.S. stock market. I'm sure a lot of your clients can relate to some of these older names in the index. Some of these obviously have not been great performers, but I thought it was interesting to overlay this to the concentration story, just how dynamic the evolution of the market is.
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Switching gears to the international side of the story seems odd to say that international is leading so far in 2025 that that's the case. It's been a while that we could say that. International stocks up over 7%. A lot of that is Europe of course. But look at it comparing to U.S. bonds, U.S. stocks, and cash. Very nice returns for the first few months of the year. And this comes on the back, and you see this on the bottom left-hand corner. U.S. stocks have outperformed international stocks 12 of the last 15 calendar years. They've outperformed 10 of the last 12 as well. And over that 15-year stretch, U.S. stocks have returned over 600% where international stocks have only returned 115. So it's not just the fact that they're outperforming consistently. They've outperformed by an enormous amount. And international stocks, just looking at bursts of performance in recent periods, since 2000, just wanted to see other two-month periods and where this one ranked. You can see that really it's the top 15. Certainly not the best, but right solidly in that top 15. And it was surprising how often that U.S. stocks actually came back over this stretch. I think you can see here only four of the fourteen periods did international perform over the next 12 months. So similar to what we looked at with small caps is you get a burst of performance. It just hasn’t been sticky in recent periods.
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Moving on to bonds and the Federal Reserve. Wanted to look at the fact that the Federal Reserve did go on hold with interest rate cuts, right. We've got three last year, one in September, one in November, one in December. So a total of 1% for the year, three cuts. But they did not move to begin the year, and the market is not looking for a cut. Maybe not out for a couple months here. This year maybe it's June. Maybe it's a little bit earlier. And just wanted to see what happened in other periods where the Fed was in a rate cut cycle, but they took a couple months off and they didn’t do anything. What performed in that environment? Probably not a huge shock, but bonds and fixed income actually did well. You think about what has to happen for this environment to play out. You have to have an economy that is giving the Fed some reason to pause. Maybe showing a little bit of strength. There's some inflation concerns like we're seeing today. But then at some point, they get back on that rate cutting train and bring rates down even further. And there's a lot of different periods. I thought that was interesting here. Ranging between three and seven months. You can see on the right side that bonds were the big winners here. U.S. bond, that core bond index. Really bonds across the board looked pretty good. But you saw the overall level of interest rates go down because we got back on that lower interest rate, slower economy, lower inflation story. So thought that was some interesting perspective for folks if they're thinking, waiting for that interest rate cut in a couple of months.
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One thing we saw in February as well with the good bond market performance was the fact that correlations came back in a big way. Bonds were up 2.2% in the month of February. That's the first time stocks have been down, but bonds have actually been up since 2021. You can see the last 14 months that we had stocks lose money, bonds had lost money as well. And this is the longest streak in history, if you recall. We've highlighted this the last couple of months. The previous longest streak was only six months back in 1994. So think about that. The previous longest streak going back to 1926 was only six months. We had 14 months where stocks and bonds were locked in tandem to the downside. Obviously not what we're looking out of the bond portion of our portfolio. We knew this would not last forever. We knew that bonds would kick in and they certainly did that in a big way in February. In addition to bonds, look at what some of these alternative strategies. We highlighted this in the last couple months, but I thought it was just worth repeating. Look at what some of these alternative strategies did in these months where both stocks and bonds were negative, 14 months in a row. Look at the positive performance of multi-strategy global macro or equity market neutral. Really speaks to that level of diversification bringing a lot to the table. So something to keep an eye on. I think one thing we always see is correlations are really difficult to predict. Is this going to be a trend? Are we going to see it continue bend back where bonds provide that nice level diversification? Or is it going to be a mixed bag again where they tend to move in tandem with stocks a little bit more than they have historically. That either way I think adding that level of diversification, bringing in alternatives makes a lot of sense.
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And the last slide that I'll touch on is an extension of that diversification story looking at correlation of asset classes with inflation. So what is the correlation with inflation of various asset classes? And I think this is one nice thing about today's marketplace is we have access to some of these categories, asset classes, private markets, and alternatives. And one of the biggest things they bring to the table is a correlation to inflation that's a lot higher than some of those traditional asset classes. Like look at core bonds in the far right or even U.S. stocks, which are a nice inflation heads over a longer period tend not to perform well in years like 2022 that we saw recently. But look at some of these other categories that we have access to now. Private credit, private infrastructure, private real estate, even global macro or multi-strategy on the alternative side have a really nice correlation to inflation versus some other categories that I think we've been limited to from an inflation-fighting standpoint where commodities has been always the key inflation-fighting piece of a portfolio. We have a lot more ways to get that done today without just investing in one or two categories. So I think that's one nice evolution of what we've seen in the marketplaces. We're better able to build a portfolio that can withstand some shocks with inflation. Not that we're expecting that here going forward, but certainly something to consider.
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Well that does it for us for our March 2025 Student of the Market Update. As always, if you have thoughts or comments or questions on content, you can submit those through our webpage. If you just Google BlackRock Student of the Market, it'll pop up. But we'll see you next month on BlackRock's Student of the Market Update. Thank you.
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