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This is Mark Peterson with the May 2025 BlackRock Student of the Market update.
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This month, a handful of things for you. First, we’ll touch diversification coming back in a big way, of course, a lot of stock market volatility in April, that was the big story, and international stocks continued to outperform. We’ll touch on all those. On the bond side, we’ll talk about active fixed income in the last couple years, and a very volatile interest rate world has really held up nicely. We’ll also talk about one of the biggest things that I don't think gets enough attention, the Fed’s been on pause here for several months, and the market is anticipating a cut in the second half of 2025. What does that mean historically? We’ll look at what history teaches us. Then we’ll finish up with alternatives, obviously, one of the stars recently, and then one issue that I see popping up consistently with investors and advisors across the country, even though the election is over, big political divide on how you might see the economy and the market, based on which side of the aisle you’re on.
1:03
So let’s begin, of course, with the diversification story here in 2025. It feels like it’s back, always a good reminder of why we build portfolios the way we do. Stocks down just shy of 5, bonds up 3.2, international up close to 12. Best start for international since 1993. Only 1993 and 1973 were better for international stocks to begin the year, and you can see on the far-right side, what the next eight-month meant, so beginning of the year, good for international. Generally, that carried through six out of nine periods, not every period, but six out of nine periods international was higher over the next eight-month window, and I thought it was interesting to look at some of these years. These were not great years for U.S. stocks here. You see ’73, of course ’74, ’87, all of these were not great years, 2002, of course. Those were all negative years for U.S. stocks, yet international outperformed and really held up. I think we’ll touch on that in a bit as well, but that's a feature of international, I think, besides correlations. We can talk about what they do when stocks suffer and go through periods where they’re not delivering results. International, more often than not, really pulls its weight.
2:23
Of course, the volatility that we saw in April, big story. We did do a volatility special in early April. That's still out on the website, if you want to give that a look, some great old slides that we dust off, just reminding that those volatile periods can oftentimes be a good time to put money to work, and the bigger thing is that some of the best and worst days sit right on top on of each other, so don't do anything rash with your portfolio. This chart looks at the volatility index, and I always joke that I never look at the volatility index, I only look at 2% trading days, but we did get some requests for this. Just looking at the volatility index rose to above 30 on average for April, that's the highest it’s been in quite some time, You really have to go back to March of 2020, during COVID, to find a higher period, and you can see historically, it does pop above 30. It’s actually happened 32 times, so this was the 32nd time above 30 since 1990. Out of those 31 other periods, 28 times stocks were higher one year later, and you can see on average, up over 24.9%, versus historical returns for stocks at 10.6%, so I thought that was interesting. Not always higher for U.S. stocks, but oftentimes the extreme volatility is an overreaction, and markets are higher, in this case almost by 25% one year later. I thought that was very interesting, something to frame with folks. You know, when you think about these volatile periods, it can be a good time to increase contributions, have that volatility plan, put some money to work, or reposition portfolio, take some tax losses as well. I think all those things make sense in these volatile markets. You just don't want to miss some of these best periods, because there can be some good returns on the other side, and you see that on the next slide.
4:12
I wanted to do this, I thought it was interesting just to look at some of the most volatile periods in history and show folks that these best and with days sit right on top of each other, right. We always say that in Student of the Market, “it’s the old time in the market versus timing in the market” story, but look at these volatile days, right. Whether it was 2025, you saw on April 9th, up 9.5%, after being down on the 3rd and 4th, over 10%. You see that's a very common pattern with these volatile periods, all these best and worst days just surround each other, whether it was the COVID pandemic, right, you see on the bottom-left side, or the global financial crisis up on the top-right. You have some of the best and worst days in history sit right on top of each other, and this is why you want to avoid overreacting to these markets. You don't want to go to the sidelines or sell some of your positions based on the volatility, unless you’re doing something for repositioning, rebalancing, or tax loss selling, because you can see, you don't want to miss some of these best days on the other side. We all know that impact of missing those best days can be enormous, so I thought a good visual, a good reminder, those best and worst days live in the same neighborhood. Don't get overly emotional in these volatile periods.
5:34
Then finally, on international stocks, to wrap up this stock section, we touched it earlier, but international tends to do well when U.S. stocks suffer, and instead of looking at shorter-term time periods, we widen this out to a 10-year window, so all the 10-year windows going back to the 1970s, and you can see that whenever U.S. stocks over a 10-year window return well below average, so below 6% on a 10-year average annual basis, below 4% on a 10-year average annual basis, look at the outperformance of international over those time periods. Granted, there were only 45 periods where they averaged less than 4% per year, but all 45 of those, international outperformed the U.S., and they did it by a pretty healthy margin, 2.4%, you see that on the far-right side, and even when they returned less than 6%, again, not a ton of periods there, but there were 56 of those over that stretch, and 96% of the time, international outperformed it, and again, similar story, over 2%, 2.3%, you see that on the far-right, so I think a different way to think about international diversification. It isn’t just that international is always going to zig while U.S. stocks zag. It’s when we get into those periods where you U.S. stocks don't have a good run. That's when international step to the plate and deliver that diversification, and I think that's just a tweak or a nuance to the way we think about that diversification story overseas, but you can see it in the numbers, and I think we’re feeling it this year.
7:12
Switching gears to the bond side here, I mentioned active fixed income. What do we mean by that? Just flexible strategies that can do well, whether interest rates are going up or going down. We’ve seen that pattern really since October of 2022, and I highlight the beginning of this chart on the far-left side, October of 2022, because that's when interest rates got above 4% for the first time since really 2007, and before the global financial crisis, so really 15 years where interest rates on the longer end, and even the shorter end of the yield curve, were below 4%, so this is an interesting period to look at performance. You’ve had interest rates basically stay unchanged, but you have had them bounce around quite a bit, between 3.2% and 5%, really all various stops along the way, but you can see on the right side, cash has done well, 4.6%. Certainly, nobody is going to be crushed if they stayed in cash, but look at how much better you would have done. Even the core bond index, up 5.8%, non-traditional bonds, certainly a flexible active category for the most part, 6.3%, and multi-sector bond, even better at 7.7%. I thought it was interesting to highlight this. I think it’s been quiet. The fact that these bond categories have outperformed since we reset interest rates to a higher level really speaks to the flexibility, the active nature, that they can take advantage of various environments, and not take huge bets on either side here, because I think that's been the challenge, but I think a good reminder for folks that the diversification story, when we reset interest rates higher, we were pounding the table on bonds, it’s worked out pretty well over the last couple of years. It’s just pretty quiet, and I think a lot of folks don't realize it.
9:00
I mentioned the Fed potentially cutting rates in the second half of 2025, that's certainly our view, that you get a couple rate cuts, and we’ve been on hold here since December 18th of 2024, so moving into several months, which is not uncommon. Look at all these periods where we had a rate cut pause, and then they went on to cut rates after that pause, and I thought it was interesting to look at the performance on the right side, the performance is almost identical during the actual pause period in the red on the right side. Look at bonds, up 2.7%, normally they’re up 3.4% -- or excuse me – they’re up 3.4%, normally they’re up 2.7% during the pause, or stocks are usually down during this stretch, and that's exactly what we’ve seen, down 4.7%, but look what happens to both, once we get a rate cut, resuming in those cycles. You can see stocks took off, bonds even were turbo-charged a bit. Granted, these periods were in a very declining interest rate world, for the most part, but I still thought that was interesting. We’re seeing history play out almost to a T during this Fed rate cut pause, bonds outperforming stocks, but just think about the possibility of rate cuts resuming, and what that might mean for markets going forward. History tells us it’s bullish for portfolios.
10:23
Now, of course, alternatives, can’t get away from the alternative story this year, that love of diversifications just delivered a ton. We’ve talked bout this quite a bit in Student of the Markets, that a lot of these alternative strategies are cash-plus, meaning that on top of the return of cash, they are returning some strategy level return, so they’re cash plus, and you can see that in periods when the Federal funds rate is over 3%, and this goes back to the late ‘90s, these alternative categories have returned well above cash and even stocks over these periods – 8.4% for multi-strategy alternatives, global macro 10.5%, and equity market neutral 10.5% as well – and they’ve done it with a heck of a lot less risk. You see that in the bottom boxes of the page there. So I thought that was interesting, something again that even if we do get a Fed rate cut, you’re still looking at cash rates that are still going to be right above 3% moving into 2026, and that bodes well for these alternative strategies, and they’ve delivered in this higher cash environment when we needed the diversification. When bonds were unpredictable and certainly choppy around that interest rate volatility, alternatives have really been that steadying force in portfolios, and one of the biggest things I see with folks adding to diversification across the country, are embracing these alternatives.
11:50
The last thing, I mentioned politics, I did more election specials than I’d like to admit last year, but I still see the politics clouding the lens for investors across the country, where depending on which side of the aisle you look at or which side of the aisle you’re on, the way you view the economy and market tends to be very different, and I just thought these were really interesting. We talk a lot about this in our investment portfolio solutions group, the fact that inflation expectations are 8% if you’re a Democrat, but less than 1% if you’re a Republican, and I think we all think that the inflation expectation is nowhere near probably either of those, right, it’s somewhere in between, and the same thing on consumer confidence side. They break this number out, and this is the all-time high spread, similar to the inflation thing, but this number goes back further. This is the widest spread between consumer confidence between Republicans and Democrats, you see that on the right side of the page, and you can also see how polarized it is by Presidency, especially the last couple administrations, very polarized, but this seems to be an extreme. I think we all need to be a little bit humble with our politics, check it a little bit, understanding that things might not be as rosy or as doom-and-gloomish as our political lens might lead us to believe. “Keep your politics out of your portfolio” is something we coined during last year’s election cycle, and I think even though the election is over, it still holds so true today. Just understand that hey, maybe my politics are affecting my view of what’s going on in the market, try not to be emotional about it, let the facts carry through, and focus on your longer-term investing plan. That's really key. Don't let your politics get you off the track and do something irrational. So that does it for our May 2025 Student of the Market update. As always, if you have thoughts or comments, you can find us, if you Google BlackRock Student of the Market, the webpage will pop up there. There is a section for comments or questions or content suggestions. Some of the best slides come from folks across the country, curious about different investing issues, strategies, or other facets of the market and the economy, so with that, we’ll talk to you next month on BlackRock Student of the Market update.
Disclosure slides from 14:15 – 14:25
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