Opening
This is Mark Peterson with the September 2024 Student of the Market update.
Slide 2, 00:07
This month, we'll start with a handful of things on stocks and bonds, work in some election content as well, and then start to focus on the Fed rate cut. And certainly, that lends well to the second section where we talk about cash on the sidelines. Certainly, with the Fed rate cut coming, we would expect the cash on the sidelines to maybe start moving. And then, finally, finish up with alternative asset classes and one of my favorite topics, inflation.
Slide 3, 00:37
So, let's start with the third best start to a presidential election year for US stocks, up 19.5% through the end of August. That was number three out of 25 election years that we've had since 1928. So, you can see it on the right where it ranks, only behind 1936 and 1928. So, best year by far in a long time. You have to go back to 1936 to find a better one. And probably most impressively, look at the returns on the far-right column. The next four months in these 10 best starts to a calendar year in an election year, up on average 8.2% the next four months. So, that's super impressive that all of those are positive. That momentum in an election year tends to carry through. Hopefully, that'll be the case between now and year end, but I thought the history was interesting here. Of course, September's not a great month for stocks.
Slide 4, 01:38
We see that on the next slide. It's actually the worst month out of the calendar year for stocks. I think everybody thinks October's bad because we've had some really tough Octobers historically, but it's actually September. You're down almost a full percent on average for September. So, very rare that you see a month that averages a negative return but September is that month. You can see, in election years, it's slightly better but it's still a negative number, -0.2. The good news is that after you get through September, the fourth quarter tends to be really good for stocks, up almost 4% all years, and in election years, up over 3-3.2% in election years. So, you think about that average, if you annualize that out for quarters, that's awfully good returns. So, if we do see some volatility here in September, October, the closer we get to the election, the market generally bounces back, and that momentum that we looked at in the previous slide can carry through.
Slide 5, 02:38
Now, we talked about the Fed rate cut, certainly going to come into focus here with the meeting in September later this month. I think one of the big stories, just from a market backdrop and economic backdrop, is the fact that we're set up for a Fed rate cut. And at this point, we don't see a recession on the horizon, at least in the next 12 months. And that's what this slide looks at, is just the combination of a Fed rate cut along with no recession within 12 months is really good for both stocks and bonds. We've talked about in the past. We just wanted to out lay it out again. And you can see it on the right. Look at the difference especially on the stock side. Bond side doesn't make too much of a difference. Declining rates are a good story for bonds either way. But stocks, right, that recession directly hits earnings, profits, dividends on the stock side, the market prices that in. That's the scenario we've seen the last handful of recessions. Think about especially 2008, right? That was a severe recession. Even though we're getting rate cuts, stocks were going down because of the damage that the financial crisis delivered. So, that's really what we've seen here recently. Even back to the tech bubble, again, you had the Fed cutting rates. But again, the impact of coming off that tech bubble high was too much. Stocks were going down regardless, especially on the growth and the tech side. So, I think something to focus investors on, just say, hey, keep an eye. We're going to get that Fed rate cut, but keep an eye on the economy. That's going to be really a key issue for stocks. And clearly, some of this on the stock side has been priced in, maybe a little bit more on the bond side lately since they bounced back. And we're probably going to be more focused on the economy now that we're certain we're going to get that Fed rate cut, where I think the first half of the year was all about when are we going to get that Fed rate cut. We've shifted gears and now we're more focused on the economy. But I think it's a good story to lay out for investors to really cut through a lot of the noise, especially in an election year. This is probably what matters more that will carry the day is what happens with the Fed rate cuts. We know they're coming. How much? And does the economy avoid that recession? If it does, it's really good news for portfolios, both on the stock and the bond side.
Slide 6, 04:57
Shifting gears to bonds only, just looking at the volatility in interest rates, I think this has gotten underplayed industry-wide and in the media, is the fact that since we reset interest rates higher post-pandemic, right, we were up to over 4%. 4.2% on the 10-year Treasury in October of 2022. Look at how choppy interest rates have been. You went from 4.2% down to 3.2% in April of 2023, then back up to 5% in October of 2023, then back down to 3.8% in December of 2023. Then, we got up to 4.7 earlier this year in April. And then, at the end of August, now we're back under 4% at 3.9, even lower today. So, this trading range, this choppiness in bonds, I think has been frustrating for a lot of folks because we go through these periods and you see it on the right side of the slide where some of those core bond funds have lost almost double digits in some of these periods. And that's frustrating. I think you can see the only categories where bonds haven't lost money would be non-traditional bonds. Certainly, those flexible funds in that space have delivered positive returns regardless of the interest rate environment. And that's pretty compelling. Even short-term bonds haven't done that over every one of these periods that we highlighted on the right. And then, you can see just the average annual returns over the entire period. You think about cash is delivered 4.7%, but look at how much better some of these bond categories have done. I think this has been really quiet. You know, everybody's excited that cash is returning something again. But the reality is, you've been better off really in any kind of bond strategy here since rates peaked out in October of 2022 and reset higher, now bouncing in that trading range anywhere between 5% and 3.2%. So, I thought that would be helpful, especially as you get those dollars off the sidelines in cash. Because again, we know those dollars are going to come off here as cash rates come down, as the Fed starts easing.
Slide 7, 07:10
And you see that on the next slide. You just see the flows. And we just used the start of 2023 to make it simple. Look at the flows. Double the flows into money market funds that we've seen into bond funds. And bond funds flows, those are actually pretty decent. But it just shows you how much more has gone into money market funds. Pretty astounding. And again, most of those dollars in cash have trailed. And you see on the right, the average bond fund. And these are all categories all bond funds. Since the start of 2023, 84% have outperformed. They've averaged 7.2% performance wise versus 4.9% for cash. So, pretty hefty outperformance. Just by taking a little bit more risk venturing out into the bond world, that's only going to be enhanced, obviously, as cash rates start to fall.
Slide 8, 08:05
And one last thing on cash here, not to beat it to death, but just looking at the performance of a diversified portfolio. So, moving out beyond just fixed income, I think that's realistic for a lot of folks that they'd probably owned if they did put the money to work outside of cash. They probably also own something beyond just US bonds. Look at the performance, again, since 2023. And then, again, year to date, I think quietly again, bonds have slipped ahead of cash, I think, when nobody was watching. But probably, most importantly, look at the far-right side. Look at the diversified 60/40 stock portfolio. And we're just using the simple US stock, US bond mix. So, I know everybody's going to have a lot more diversification than that, but I still think it drives home the story here that cash, while it seems attractive, there's often better opportunities out there, and you've left a lot of money on the table. I think a good reminder for folks, again, as we start to think about putting folks to work in the second half here, the last part of 2024 into 2025, get those dollars off the sidelines. Look at the folks that have been hiding out there. Certainly, they've gotten some return, but they've missed out on a lot of upside of the diversified portfolio.
Slide 9, 09:24
Let's switch gears now to alternatives and just talk about interest rates and the impact on alternative performance and all asset classes for that matter. We're exiting an environment where we've had an inverted yield curve, which is very counterintuitive for investors. Because in an inverted yield curve means short-term interest rates are higher than longer-term rates. And you can see on the chart on the left, it only happens about 15% of the time since the start of 1994. And you see that whenever the line drops below zero, that means short-term rates are higher than long-term rates. So, it's been the case for the last couple of years here, which is very extended. Really, you have to go back to the 70s to find a period where we've had as long of an inversion as we've had. Question is, what happens to asset class performance as you exit this inverted environment? You can see that generally, what happens is [inaudible] performance tends to be really good across the board. Bonds, probably a little bit less. They tend to do better in an inverted curve environment. We really haven't seen much of that performance. But look at everything else, including stocks. Really good performance in a flat yield curve environment. Alternatives. Some of these categories, their best performance is, excuse me, in a flat yield curve environment, some of their best performance is when the yield curve is flat. So, I thought that was interesting. As long as cash rates don't drop too much, we think performance on the alternative side will still remain pretty strong. Remember, alternatives tend not to use all their assets to put money to work, to execute their strategy. So, some of their funds are sitting in cash. So, they're getting cash plus their alternative strategy return on top of cash. So, higher the cash rate, the better the head start they have on total return performance. I think you've seen recently, the performance across the industry has been great with some of these alternative strategies. Really, a lot of the things that we promised years ago when alternatives first made their place in the mutual fund structure, the fact that we could deliver decent returns, but also diversification beyond stocks and bonds, I think we're finally at that place. And this should remain a good environment going forward.
Slide 10, 11:43
Last slide on inflation. Just thought this was really interesting. Looking at the fact that we're going to get lower interest rates, right? We talked about the yield curve. That isn't inverted or going to be moving out of the inverted into a more of a flat environment. And just looking back historically, whenever the yield curve has been inverted, shelter inflation has been really high. And you can think about this for whatever reason. Maybe there's causation. Maybe there's correlation here. Or maybe there's just more coincidental in nature. But you can see that 7.4% average shelter inflation whenever the yield curve is inverted. And you saw that this time around. You see that on the left side. Look at that divide between the red line and the yellow line. And look at last time we had super high inflation, same story. Yield curve was inverted and shelter costs were really high back in the late 70s, early 80s. And you can see opposite environments, when the yield curve got really steep, shelter costs were really low. So, some of this might have to do with the fact that you might get a recessionary challenge, right, that causes the Fed to lower interest rates. So, that lightens the cost to finance a home or, right, if you have a rental property, certainly gives you that ability to refinance on the short end. But just thought this might be good news on the inflation front. The fact that the yield curve's normalizing, that historically has been associated with less shelter inflation. And if you recall, shelter's been the one sticky or lagging part of the inflation story that's still over 5% or right in that ballpark. And that might be the extra boost that inflation needs to continue to go down between now and year end. Lower interest rates will be some relief for the housing market, which might help that inflation story.
Slide 11, 13:44
So, that does it for us for our September Student of the Market update. As always, if you Google BlackRock Student of the Market, you can find us out there. And it is always end client, end investor approved. Also, if you have ideas for content or charts, certainly funnel that through our webpage as well. There's a spot to do that. Some of the best ideas there come from advisors across the country. So, thanks again, and we'll see you next month on BlackRock's Student of the Market Update.
