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March 2024 highlights

Opening

This is Mark Peterson with the March 2024 Student of the Market update.

Slide 3, 00:07

Let's begin on the stock slide. It's a good start to 2024 with stocks positive here in the US, both in January and February. January up 1.7%, February up 5.3%. And historically, it's a good sign when you have a positive start to the year in both January and February. The next 10 months, on average, are up 11%, 11.1%. You see that on the left side of the slide going back to 1926. The only better combination actually is what happened last year where you have a positive January and you give some back in February, and you have a negative February. Historically, you're up 13.9% the next 10 months, but this is the second best combination. Better than having both a negative Jan and February, or a negative January and a positive February is actually the worst combination. But I think one thing on the right side of the slide that I thought was fascinating is that we've had since 1938, 34 times that January and February have both been positive. So, 34 calendar years in which January and February have started positive. But only two of those years, 1987 and 2011, have stocks actually finished lower the next 10 months. So, think about that. Two out of 34 calendar years is remarkably low. So, very bullish sign that we're off to a good start to the calendar year. Often times, that momentum carries through.

Slide 4, 01:43

Looking at volatility on the next slide, our favorite chart, just looking at plus or minus 2% trading days in the S&P 500. We actually had one, finally, on February 22nd of this year, a positive 2% trading day. The first 2% trading day that we had in more than a year. You actually have to go back to February of 2023, February 20th, actually. So, a little bit more than a year to find the last 2% trading day. So, that low volatility environments continued to exist. Certainly, have not had any other 2% days here recently. They tend to cluster together, by the way, as well. But did not see anything on the back of that February 22nd 2% day. And of course, this tells the story that a low volatility world tends to be really good for stocks. You can see on the right side, when you have 10 or fewer 2% trading days in the S&P 500, you average almost 18% in that calendar year versus years when you have 10 or more 2% trading days, essentially flat on average in those calendar years. So, big difference and something to keep an eye on for the rest of the year. This low volatility world, if it continues, bodes well for stocks in 2024.

Slide 5, 03:02

Looking at the Fed, Federal Reserve now and the potential to cut interest rates. Cut that Fed funds rate later this year. Just looking at that dynamic, not just cutting rates, but adding on what happens to the economy on the backside of that. When you get a recession, that tends not to be real good for stocks over the next 12 months. So, we just looked at if you had a Fed initial rate cut and then a recession and within the next 12 months, you only averaged, or I should say you lost 5.6% in stocks on average. Granted, the small sample size here, you have 2001, 2007, 2019. So, only three instances here in the last 40 years where you've had a Fed rate cut and then a recession within the next 12 months. That has not been good for stocks and certainly have some dramatic periods there like 2007 and the global financial crisis or 2019 right before the pandemic and the shutdown. Then you have other periods on the other side. When you get a Fed rate cut with no recession, that soft landing or that Goldilocks type scenario, look at the return for stocks. 21% one year after the initial rate cut with no recession. Certainly, this might be the reason why stocks are off to a good start to the year and why they finished strong last year, is greater confidence that we might fit this scenario of getting a Fed rate cut, but no recession within the next 12 months in sight. That's that soft landing that everybody talks about. I thought it was interesting to just look at that break between those two scenarios here recently. And then, also on the bond side, look at the bond numbers here. Granted, some of those early periods back in the 80s, 90s, interest rates were a lot higher, so that income portion of the bond return was much higher than some of the more recent periods. So, actually, a recession would probably be better, a Fed rate cut. And a recession would be better for bonds, put more pressure on interest rates to go lower more quickly than if you got no recession and just a Fed rate cut. So, something to keep in mind. But could be a big story here in the back half of 2024.

Slide 6, 05:26

Moving on to stock market milestones. Got some comments and questions on this. Given the fact that we did hit a milestone here went over 5,000 on the S&P 500 on February 9th, and just wanted to look at some of the market all-time highs and milestones, what it meant for stocks. Granted, each of these periods, I think you start looking at these, they're all unique in their own way, but not unusual to hit milestones, especially when you get in a good stretch for the market. You can hit these milestones on a pretty regular basis. And probably, most importantly, look at the far right side. Look at following some of these milestones, what stocks did one year, two years afterward. Hard to find a negative number here. There is one period there post-2014, but pretty modest. And you were higher two years later. So, I think that's really the takeaway here. I don't want to make too much of it. But I think it does reinforce that you hit some of these highs, you hit some of these milestones, often that momentum carries through for a longer period of time, which at least what history shows us.

Slide 7, 06:33

Let's move on to the next slide. Looking at diversification of stock, mutual funds, and ETFs versus individual stocks. I think this is always a challenge. When you get in an environment like we've been in, where individual stocks have put up tremendous gains, especially some of the biggest, best-known names within the US stock markets, the Apples, Googles, Amazons of the world. That Magnificent Seven, putting up great returns last year. Some of those stocks pulled back a little bit here this year. So, others have continued to carry on, but it makes individual stock investing look awfully easy. And I just wanted to remind folks that you still have a lot of stocks that lose money, even in a good market. The last five years here, you can see all the individual stocks on the New York Stock Exchange and the NASDAQ, several thousand stocks here when you include both of those exchanges. 36% have actually lost money over the last five years in a good stock market. So, you still have fairly significant losses. You can actually see the numbers, what the losses look like on the right side of the slide. You can see that you actually had about 35 of those names essentially lose all their value, 75 to 100% down over that five-year window. So, certainly, you still have that downside risk with individual stocks. Compare that to mutual funds and exchange-traded funds that invest in stocks, only three out of 2,000 mutual funds and exchange-traded funds that invest in US stocks actually lost money over that five-year period. So, you can just see the benefits of diversification, that downside, mitigated tremendously by embracing diversification at the mutual fund and the exchange-traded fund level.

Slide 8, 08:20

Switching gears to money market funds. Of course, they dominated flows last year. Just want to put the numbers up here because I just think it's amazing. Almost a trillion dollars in money market inflows in 2023. Compare that to all the bond mutual funds and ETFs out there, they only took in about $223 billion, which is a pretty good year for bond inflows. But it is dwarfed by that money market total, about four times the amount in money market fund inflows last year. And it makes sense, given how difficult 2022 was, worst bond year ever. You had money market yields earning 4% or 5% for the first time in probably 15 years. Really set up a trap for, I think, a lot of investors that said, 'Hey, I'll sit this one out. I'll take my 4% or 5% cash.' But you can see on the right side of the slide, most bond mutual funds and ETFs actually outperformed cash last year. And granted, a lot of that was towards the end of the year, but you did see 84% of bond mutual funds and ETFs outperformed cash. This is often what we see historically when you get in this type of cycle. Cash looks attractive, but there's often better opportunities and bonds and fixed income. If you're willing to venture out, I think it's a great time to sit down with advisors and think about some of those opportunities, especially given the fact that we're in this sweet spot where the Federal Reserve's done raising short-term interest rates, is talking about, or at least the market's anticipating they'll cut rates at some point here in 2024, second half of 2024. Those cash rates will come down. And certainly, bonds could benefit from a total return pop.

Slide 9, 10:08

And you see that on the next slide. We just wanted to put some numbers to it. What's happened when we've seen cash yields fall in a calendar year by 1% or more, or go up by 1% or more. So, the first one on the left, you can see, when cash rates have fallen by 1% in a calendar year, you get a 4% bond return price bump along with the income. So, it's not just the fact that we've got better interest rate levels when we start seeing cash rates fall. Bonds also, interest rates often fall with that as well, resulting in a bond price return positive impact to the total return. And the opposite is true. When you see cash rates go up, you see that bond price return as a negative impact to return. So, I thought that was interesting just to put some numbers to it. I think a lot of investors lose sight of this. Again, I think it happens when you get enamored and you fall into that temptation with cash. Cash looks attractive at higher yields, but you're ignoring the fact that you might get a nice positive total return bump on the bond side.

Slide 10, 11:25

One more on cash. Just wanted to look at a diversified portfolio versus cash. So, 60-40 versus cash over time. How often does a 60-40 portfolio outperform over various time periods? You can see no 20-year periods in which a 60-40 loses to cash, and you barely find any over the 15-year or even the 10-year stretch. You have a couple of those periods where cash is paying double digits, back in the late 70s where it works out. But you can see the odds of outperforming very, very small over time. And probably more importantly, and we looked at this last month on the stock side, look at the degree of underperformance. It's enormous, the underperformance that you see. If you start waiting in cash and not investing in that 60-40, it's about 6% for one year, 12% for two years. If you wait five years, on average, you've dug yourself a 36% hole, meaning that you've underperformed a diversified portfolio with cash by 36% on average over those five-year periods of time. And of course, it gets uglier as you move out to 10, 15, and 20 years. Just the opportunity cost lost of not putting that money to work in the 60-40 can be huge.

Slide 11, 12:46

So, that does it for us for March 2024 Student of the Market update. As always, if you have questions or comments, funnel that through our Student of the Market webpage. If you Google BlackRock Student of the Market, you can find it out there. And we'll see you next month on BlackRock Student of the Market.

Low stock volatility has historically benefited stock returns

2/22/24 was the first +/-2% trading day we’ve seen YTD for stocks, and also the first in more than a year. Years with <10 such days have averaged ~18% compared to 0.3% when there are >10.

Most bond funds outperformed cash in 2023

Almost $1T flowed into money market funds in 2023 – more than 4 times the amount as into bond funds. However, 84% of bond funds outperformed the average taxable money market return.

Diversified portfolios tend to win in the short- and long-term

A 60/40 portfolio has outperformed money market funds ~70% of years, and by ~6% on average. Both the odds and outperformance only get worse for money market funds as time goes on.

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