Put markets in perspective

Opening

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

Slide 2, 00:07

This month we've got a handful of things on stocks, including some election nuggets, some things on interest rates and bonds. Certainly, a big driver of stories this year, the fact that rates have backed up. We're in a very long period where the yield curves inverted. We'll touch on that. And then, finish up with a couple of my favorites. High yield, always one of my favorite asset classes. And then, a newer one to most, private credit, getting a lot of interest across the industry.

Slide 3, 00:36

So, let's jump right into the stock story. And talk about the election. This is actually a bullet point or soundbite I was using with some of our previous election content that some advisors wanted me to put down onto a slide. So, it just looks at the fact that stocks tend to lose money less often in election years. You go back 24 election years, back to 1928. And only four election years out of 24 have actually lost money. So, that's one every six years, and that's about 17% of the time that stocks lose money. You contrast that to non-election years, and you lose money about 30% of the time. So, almost double the likelihood of losing money in a non-election year than an election year. And if you look on the right, look at those down calendar years, or excuse me, those down election years. Going back to 1928, it really took a major economic event to get stocks negative. You can see 1932 was negative. That was, of course, right in the middle of the Great Depression. 1940 was World War II. 2000 was the tech bubble bursting. And, of course, more recently, 2008, the global financial crisis. So, election years generally are pretty good. The only time they've been negative is when we've had a major economic event to coincide with that.

Slide 4, 02:11

The next slide looks at interest rates and stock returns. I think some folks have been surprised how well stocks have done in the face of higher interest rates. You just look over the last 12 months, the 10-year US Treasury bond yield is up about 1.3%. So, pretty healthy move over that one-year window, yet stocks are up almost 23%. I think a lot of folks think that rates go up, stocks automatically struggle. It's just not the case, though. Historically, you can see on the right, periods when interest rates moved up by 1% or more, it's very much a mixed bag, slightly less than average overall. But you do have some good periods for stock returns, generally coming out of a recession. When the economy starts to recover, interest rates start to go back up, and stocks can have some pretty explosive returns. We saw that most recently. It was actually the best period where we saw higher interest rates coming out of 2020 and the global pandemic into 2021. You had over a 50% return for stocks, even though interest rates went up by over 1%. So, I thought that was interesting, that it is a little bit more of a mixed bag, I think, than most people would expect when interest rates go up. You do have some tough times periods in there, as well. 1969 to 1970, 1973-74 was marked by higher interest rates and a very sluggish, struggling economy, which dragged on stock returns. And then, of course, when interest rates do go down, that's often the sweet spot for stocks, as well. They become a lot more attractive as interest rates move lower.

Slide 5, 03:53

Moving ahead to the next slide, looking at sell in May and go away, a famous stock market adage that says the six months starting May 1st to October 31st, what we call mommies-to-mummies, May being the month of Mother's Day, and of course October 31st being Halloween. That six-month stretch is generally the worst six-month stretch for US stocks. And the best six months is the opposite six months, November 1st to April 30th, turkey to tax. As we call it, you can see that stocks average 7.4% in that six-month window versus only 4.3% in that mommies-to-mummies period. But we looked at it in election year, and I was surprised to see that election years are much more neutralized from a seasonality standpoint. 6.3% during that mommies-to-mummies window, and then 6.9% once you get to the election November 1st to April 30th following the election. So much more neutralized in an election year, at least from a seasonality standpoint. And bonds, you can see on the right side were pretty similar in both seasons, but you tend to do a little bit better in that May 1st to October 31st for fixed income. So, maybe this is a little bit of a rallying point for bonds after a sluggish start to 2024. Maybe they can pick up some of that slack in this mommies-to-mommies period.

Slide 6, 05:24

Moving on to all asset classes, I had some folks wanted to update this chart. One of our favorites, it just looks at what percentage of asset classes across the industry are positive or negative for the year. So, just looking at the percent negative going back to the early 1990s, and we're defining asset classes by mutual fund categories on Morningstar. So, there's a bunch of them. There's actually 124 now, believe it or not. And 46 out of those 124 or have lost money year to date. Many of those are bond funds. So, you have 37% of all asset classes lost money so far this year, which is not great, but nowhere near some of the bad years. Like we saw in 2022, you saw 94% of asset classes lose money. So, just about everything lost money back during 2022. And that happens every once in a while, whether it's 2018 or 2008 or 1994. You have everything in a portfolio struggle, and that's frustrating. But look at the periods after all of those really tough years. You tend to get pretty good years following that where almost everything makes money. And last year fell in line. 96% of categories made money. Only 4% lost money last year. So, it's a little bit unusual that we're off to a slow start this year because look at some of those other periods, whether it was 95, 96, 2009, 2010, or even 2019, 2020 had some pretty good periods where just about everything made money following those really rough years. So, this would buck that trend if we saw this 37% continue for the rest of 2024. I have a feeling that 37% number might improve as we get deeper into 2024.

Slide 7, 07:21

Now, switching gears to bonds and interest rates, of course, need to talk about the inverted yield curve. This is when short-term interest rates are higher than long-term rates. This is actually the longest window of time where we've had that be the case. 19 months now from October 2022 to April 2024. That's a pretty long stretch of time here where the three-month treasury bill has been yielding more than the 10-year treasury bond. So certainly, that's not a natural thing. I just wanted to look at performance of asset classes versus their historical average whenever the yield curves inverted. And you can see interesting dynamic where stocks have done a lot better this time when the curve's been inverted, probably because we're pricing in that no recession story. But bonds have done a lot worse because inflation's been stickier. You can see normally bonds do really well coming out of that inverted yield curve environment. They average almost 7%, 6.7%. They've done just about half that so far. But I wonder going forward, if we start to move out of this inverted curve environment, do we see bonds rebound in a big way? Maybe stocks cool off a bit, but certainly something to keep an eye on.

Slide 8, 08:42

One of the things we wanted to look at on the bond side is just how volatile the recent interest rate environment has been. The 10-year treasury yield has bounced over the last year and a half from 4.2 to 3.2 to 5 percent back down to 3.8. Now we're back up at 4.7 percent here at the end of April. That's a really rough ride when you look at interest rates historically. I think that's been really rough on portfolios because you have some pretty big losses on the bond side. Even the rates have been higher. And maybe this is our new reality in a higher interest rate world where inflation's a little bit stickier than we thought, that we get a little bit more volatility and big swings in rates. And on the right side, we just looked at some of the other bond categories, certainly look at cash and intermediate core bond. You can see the challenge that core bonds have had where they were down 7% for a good chunk of last year, down over 3% to start this year. But then you have some pretty good returns in between there. And the last thing you want to do is try to time these interest rate swings. They're just too difficult to do that. So, we highlighted some other categories that have really held up well. Look at how well that non-traditional bond category is. Very active, very flexible category. Significantly outperforming core bonds and cash over this year and a half stretch. Plus, that non-traditional bond category has been positive, whether interest rates are up or down. So, it's actually been positive at each step along these cycles. Certainly, would have added a lot to a bond portfolio, at least would have helped steady the ship in the storm of wild interest rate swings. So, something to think about when you're looking to diversify your bond portfolio, maybe add some of that active flexibility that that non-traditional bond category can bring.

Slide 9, 10:49

Last couple charts here. First off on high yield, I mentioned high yield's always one of my favorite asset classes. I call it the Rodney Dangerfield of asset classes. Tends not to get any respect. And if you look historically, high yield has been pretty easy to figure out when is a good environment to buy high yield. You buy it generally when yield spreads are wide to treasury, meaning that high yield is probably sold off or had a really rough stretch. And yields are pretty high in general. So, if you can get wide spreads with big yields over 7%, you can see over the next 12 months, high yields averaged over 9.4% on the right side. But that's not what we have today. We have spreads are pretty tight, reflecting a pretty strong economy, meaning low default rates on a lot of these high yield bonds. So that's a good thing fundamentally, but certainly high yields not cheap. But yields are still relatively attractive, especially versus what we've seen in recent years, over 7%, almost 8% yields right now on high yield bonds. And you can see in this environment where you have tight spreads reflecting a good economy, but you're still getting rewarded with a pretty healthy yield over 7%. You can see that on average, high yield bonds do slightly better than average in that environment. I thought that was a little bit surprising. I always thought that you only wanted high yield when spreads were wide and yields were big, but it's a little bit more nuanced than that. There're some opportunities in this type of environment. This is what we hear from our investment teams. Be selective on the high yield side. There's some areas of opportunity here to take advantage of those higher yields. So, I thought that was interesting, a little bit deep in the weeds on the high yield asset class but hopefully something that I think really on the back of our previous slide why some of these flexible strategies can win in this type of environment is they can utilize some of these categories and be opportunistic to add some yield, add some return overall.

Slide 10, 12:56

And finally, private credit, certainly gaining a lot of attention across the industry. I wanted to look at it, what it does in different interest rate environments. So, you can see the returns for private credit on the left side. Of course, this asset class won't appeal to everybody, whether it's not appropriate or there's not the opportunity or the access to get there. But I did think it was interesting on the right side. Look at what private credit did, whether the Fed was raising rates, or the Fed was cutting rates. Held in there pretty well. Over 8% when the Fed's raising rates, over 7% return for private credit when they're cutting rates. That's a pretty nice dynamic. You can see it was much more of a difference for high yield bonds, bank loans, which are somewhat similar to private credit are much more impacted by the Fed action where private credit tends to do well regardless. So, I thought that was interesting. I know folks were concerned, you know, is this the right time for private credit, especially if we do get a Federal Reserve rate cut in the second half of the year? History tells us this is still a good time.

Slide 11, 14:08

So, that wraps it up for the May 2024 BlackRock Student of the Market update. As always, you can find our material. If you just Google BlackRock Student of the Market, it'll pop up there. And we always look for content, suggestions, questions, some of the best ideas. This month especially was heavy from advisors and folks in the field who are getting questions from end investors. So, always encourage that we have a space on our website to do that. So, with that, thanks again, and we'll see you next month on BlackRock's Student of the Market update.