Student of the Market

0:00
Welcome to the September 2026 edition of Blackrock's Student of the Market.

0:07
This month, we'll look at the market that has continued to reward investors, but where the story beneath the headline is becoming more nuanced.

0:16
We'll start with U.S.

0:17
stocks and the historical patterns around midterm election years, then compare today's AI rally with the.com.

0:26
From there, we'll examine how benchmark construction is shaping emerging market results.

0:32
We'll finish with investor flows, the changing relationship between cash and bonds, flexible income strategies, and the potential role of alternatives.

0:42
As always, the goal is not to predict the next market move.

0:47
It is to use history and current data to put today's market environment into perspective.

0:53
Let's begin on slide three.

0:55
U.S. stocks have had an unusually strong start to the midterm election year.

1:00
Through August, the market was up 13.14%, making 2026 the six best first eight months of a midterm election year in this nearly 100 year history.

1:14
The left side provides important context.

1:17
Across all midterm election years, the average return during the first eight months was only 1.62%, while the average return during the final four months average 5.56%.

1:31
The table on the right narrows down the analysis to the 10 strongest starts.

1:36
Those years gained 15.49% on average through August and another 5.7% over the final four months.

1:46
The outcomes are not uniformly positive as 19861978, 2018 all declined from September through December.

1:56
The takeaways?

1:56
That strong momentum has often continued, but history provides context, not a forecast.

2:03
Moving ahead on the next slide, the next question is whether September's reputation should change the outlook.

2:10
Historically, September has been the weakest month for U.S.

2:13
stocks with an average return of 0.78%, negative 0.78%.

2:21
The pattern is slightly worse in midterm election years, when September averaged a -1 point O 9%.

2:28
That seasonal weakness is real in the historical data, but it's only one month within a broader pattern.

2:35
In midterm election years, the average returns for October, November, December were two point 452.80 and 1.17% respectively.

2:46
So the historical message is not simply that September is weak, it is that difficult.

2:51
September has often been followed by a stronger fourth quarter.

2:55
Investors should avoid using seasonality as a market timing tool, but it can help set expectations for periods of normal volatility following a strong year to date rally.

3:06
If markets experience weakness in September, it may present a reasonable opportunity for long term investors to put cash to work.

3:13
Next, we look at technology leading the market.

3:17
Comparisons with the dot com bubble are understandable.

3:20
The data, however, shows that the the magnitude is very different so far.

3:25
On the left, the technology sector's cumulative rise following the launch of ChatGPT remains remains well below the advance that followed the Netscape IPO.

3:37
On the right, the contrast is more specific.

3:39
Technology gained 360% over the three years ending in March 2000, compared with 127% over the last three years ending in August of 2026.

3:55
Those numbers are cumulative.

3:57
Valuations also differ sharply.

4:00
The sector traded at 55 times forwardearnings@the.com peak versus technology trading at 21 times earnings today.

4:11
This does not mean technology is inexpensive or immune to a correction.

4:16
It means the current AI driven rally has been more measured in both performance and valuation than the late 1990s experience.

4:26
Switching gears to emerging market stocks, they're a great example of why benchmarks matter.

4:32
Through August, the MSCI Emerging Markets Index returned to over 24% compared to 12.7% for the FTSE Emerging Index.

4:43
The main reason is South Korea represents 20 percent, 20.85% of the MSCI Emerging Markets Index, but it's not included in the FTSE Emerging Market Index.

4:55
That different also changes the sector mix technology over 40% in the MSCI Index versus over 31% for the FTSE Index.

5:05
The country weights of China, Taiwan, and India also differ meaningfully.

5:11
Even valuation comparisons are affected.

5:14
The MSCI index as a trailing PE less than 12 compared with 15 for the FTSE index.

5:23
The practical take away is that 2 funds labeled emerging markets can produce very different results because they may own different countries, sectors, and companies.

5:32
Benchmark selection and investment decision, not in administrative detail.

5:39
Moving on to bond fund flows and future market performance, investor behavior remains much more cautious than the stock market performance might select.

5:49
Over the last 12 months, bond funds, both bond fund mutual funds and ETFs, took in more than $466 billion more than stock funds.

6:01
The chart on the left shows that this is a large gap, although not unprecedented.

6:06
The chart on the right asks that what happened after similar extremes.

6:10
When bond funds flows exceeded stock fund flows by more than $200 billion, U.S.

6:17
stock returned on average 19.1% over the following year, while US bonds returned only two point O 7%.

6:27
When stock fund flows led by more than $200 billion, stocks returned only 5.33% and bonds returned earned 5.58% on average.

6:39
This is not a market timing signal and and the current outcome may differ, but historically heavy demand for bonds has often reflected caution rather than an end to an equity advance.

6:52
Strong bond flows can coexist with favorable subsequent stock returns.

6:59
Building on that, looking at money fund flows, slowing the composition of defensive flows is also changing.

7:06
Money market funds received $1.149 trillion in 2020, three $949 billion in 2020, four 886 billion in 2025, but nog in 2026.

7:22
Through August, that figure is only 213 billion.

7:26
Bond funds, by contrast, received $575 billion through July of 2026.

7:33
The annualized pay shows here is about 320 billion for money funds and 986 billion for bond funds.

7:41
One possible driver is a change in the Treasury curve.

7:45
At the end of 2023, the three months Treasury yield yielded around 5.4%, well above the 10 year Treasury yield of 3.88%.

7:55
By August of 2026, that relationship has reversed.

8:00
The 10 year Treasury yielded 4.75% and the three month Treasury yielded 3.91.

8:08
As longer term yields become more competitive, investors had more incentive to consider bonds rather than remain entirely in cash.

8:17
The relationship is historical and correlated, not necessarily casual.

8:22
The fixed income challenge has not simply been the level of rates, it's also been the size and frequency of of the swing.

8:29
Since the 10 year Treasury first moved past 4% in October 2022, yields have repeatedly moved between roughly the low 3% range and the high 4% range.

8:42
This table shows how different bond approaches perform during each move.

8:47
In the rising rate period from April to October 2023, core bonds lost 7.29% while multi sector bonds lost only 2.12% and non traditional bonds gained 0.22%.

9:02
The latest period from October 2025 through August 2026, multi sector and non traditional bonds gained 2.28% and 2.18%, while the core bond index declined to 0.54%.

9:19
Across the full.

9:20
Annualized returns were 6.91% for multi sector bonds, 5.73% for non traditional bonds and 4.71% for core bonds and 4.22% for money market funds.

9:35
Although active strategies carry their own risk and outcomes can vary, flexibility has historically been rewarded.

9:43
Active flexible fixed income strategies have outperformed the index across the entire period examined.

9:50
Let's finish with the diversification challenge that has changed in the current decade.

9:55
From 2020 through August 2026, the maximum drawdown was 23.87 for U.S.

10:01
stocks and 17.18% for US bonds.

10:05
At the same time, the correlation between stocks and bonds rose to 0.51, meaning bonds provided less diversification than investors experienced the prior 2 decades.

10:17
The equity market neutral category shown here had a maximum drawdown of 5.2%, volatility of 3.25, and stock correlation of 0.02 over that same.

10:30
The combination illustrates the potential value of a return stream that is less dependent on the direction of traditional markets.

10:39
This this slide uses equity market neutral as one example, not as a proxy for every alternative strategy.

10:46
The broader take away is that when stock and bond diversification is less reliable, carefully selected alternatives may help manage drawdowns and portfolio risk.

10:58
In summary, in closing, this month's BlackRock Student of the Market shows that strong markets can coexist with cautious investing positioning.

11:07
U.S. stocks have entered September with strong momentum.

11:10
Today's technology rally remains more measuredthanthe.com bubble and defensive flows are shifting from cash towards bonds as longer term yields become more competitive.

11:21
The takeaways?

11:22
To remain invested, selective and diversified, investors should look beyond short term season, understand the exposures behind their investment, consider flexibility within fixed income, and evaluate alternatives where appropriate.

11:37
The goal is not to predict the next market move, but to build a portfolio that can seed across a range of outcomes.

11:44
Thanks for listening.

11:45
We'll see you next month on Blackrock's Student of the Market.

GPS0926-M-5923849-EXP0927