Episode Description:
Global markets have been experiencing extraordinary volatility in response to the U.S. tariff pause announced on April 9th, a reflection of the uncertainty surrounding the economic and policy outlook. But similar to other unprecedented market moments in history, the investment strategies that work today may not apply tomorrow. So how can investors adapt their investment approach, when the familiar economic rulebook is thrown out?
Rich Mathieson, a senior portfolio manager within the Systematic Active Equities team, a quantitative investment group at BlackRock will take us through some of the pivotal moments in history where uncertainty was a catalyst for transformation in the insights and strategies used by investors. He’ll share how that’s playing out in markets today, including how he is using data and techniques that can help investors cut through the headline noise
Sources: 'Stocks Advance as Nvidia Closes at All-Time High: Markets Wrap', Bloomberg January 2025; 'Investors haven’t been this bearish in 30 years' Blooomberg, April 2025; 'Is This The Brink Of The Recession We Have Yet To Have?' Bloomberg, April 2025; BlackRock Systematic, as of April 22, 2025. Comment references momentum and crowding signals; Bloomberg data for MSCI World Index performance, referencing performance during the month of April 2025; 'As tariffs roil the markets, here's why some sectors are faring worse than others', CBC News April 2025; 'The Magnificent 7's lousy year, by the numbers', CNBC, April 2025; Bloomberg, performance of S&P 500 Index for 2023 and 2024
This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures
the bid, tariffs, investing insights, tariff, tariff pause, us tariff pause, investing podcast, tariff war, tariff relief, tariffs and economy, finance, trump, economy, inflation, blackrock, economic growth, market volatility
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Oscar Pulido: Global markets have been experiencing extraordinary volatility in response to the US tariff pause announced on April 9th. A reflection of the uncertainty surrounding the economic and policy outlook, but similar to other unprecedented market moments in history, the investment strategies that work today may not apply tomorrow. So how can investors adapt their investment approach when the familiar economic rule book is thrown out?
Welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.
Coming up on The Bid, we continue our market coverage following tariff policies and their impact on the global markets. We're recording this episode on Tuesday, April 22nd.
To help us put these market events into context. I'm joined by Rich Matheson, a senior portfolio manager within the systematic active equities team, a quantitative investment group at BlackRock. Rich will take us through some of the pivotal moments in history where uncertainty was a catalyst for transformation, and the insights and strategies used by investors. He'll share how that's playing out in markets today, including the data and techniques that can help investors cut through the headline noise.
Rich, thank you so much for joining us on the bid.
Rich Mathieson: Thanks, Oscar. Lovely to be with you.
Oscar Pulido: Rich, we've actually spoken to some of your colleagues in the systematic investing in the past People like Jeff Shen, people Brad Betts, and talked to them about how your teams big data artificial to go I'd love to ask if we take a step back and in the a lot of had of news around policy foreign news coming you about this relative other historical periods
Rich Mathieson: Yeah, I think there's been, there's maybe been two or three unique features of this particular episode. I think the first one would be the speed at which it's evolved. The start of 2025 seems a long way away, but it was only really, three and a half months ago. We started the year with a white-hot US economy, equity markets, all-time highs, inflation coming back towards Fed target. And generally a sense of bullishness across the investor base. Fast forward three and a half months things are very, very different. If you look at macro and investor sentiment levels, they've completely capitulated. Interest rates are higher than they were at the start of the month, inflation expectations are rising and actually for many investors, recession has become a likely bear case scenario, if not a base case scenario. So things have changed very quickly and the way that we've seen that play out in our data is that it seems like a lot of investors have been taken by surprise. If you look at measures of riskiness around popular momentum trades and crowded hedge fund positioning, they are flashing very, very red at the moment. And that's leading us to rotate our portfolios quite significantly away from some of the winning trades from the last two or three years.
A second feature is the starting point, no matter how you cut it, valuations, particularly in equity markets, were very, very rich, and that was particularly the case for U.S. assets. and it's somewhat sobering that, even with a peak to trough draw down of 17% in the MSCI world, as we've seen during the month.
And then the final one, I think maybe the most pertinent point is that in this episode, investors, have found it a lot more challenging than normal to isolate sources of defense to protect their portfolios. if you think across that level, normal, safe havens- dollar denominated assets, particularly US treasuries -have not given the ball that investors would've hoped for, when we drill into the equity markets areas like high quality tech that have been sources of defense in the past, have, if anything, been more at the epicenter of the downturn.
And then even more traditional defensives, thinking pharmaceuticals, consumer staples in many instances have brought you into the crosshairs of escalating trade tensions and tariff policy. And so, know, you've had to think very carefully about where defense sits in your portfolio, how to measure it, how to get exposure to it, and that has been one area where data has given us a very nice edge.
Oscar Pulido: And Rich are there any similarities or differences to other periods, periods like the 1990s perhaps I'm just curious how this compares to history.
Rich Mathieson: The similarity here is that we're seeing something that we have never seen before. And if I think over the last five years, we just had the fifth anniversary of Covid back in March. and I think in the five-year period since then, we've seen a rate of change in events in the market that pretty much you could all describe as 'unprecedented'. We had a lockdown, we had a global pandemic, we then had vaccines and a reopening of the global economy that none of us have seen before. We then had inflation and interest rates rising at levels that haven't really been observed since the 1970s. You then had the introduction of big secular themes like artificial intelligence and then more recently obviously the escalation in trade tensions that very few of us have seen the likes of in our careers.
So, the one thing that all of these episodes have had in common is that they have been unique, they have been different. it's made us really think about how we can use the data that we have at our disposal, the technology stack that we've built up over the last 10 to 15 years to answer, these emerging investment questions in a way that is very differentiated that maybe we wouldn't have been able to do before.
As a great example, I think about artificial intelligence. January, 2023, we were actually underweight or short Nvidia across most of our portfolios. Nvidia came out and produced earnings that were significantly above expectations, and they attributed it to artificial intelligence. Now, we had been using artificial intelligence to build models, to build signals to pick stocks, so we were already adopters of the technology, but it was the first time we had really seen a company monetize the opportunity in the way that Nvidia clearly were back at that time.
And then pretty much Q1 ‘23. Every single technology stock in the market claimed they were investing in artificial intelligence and they were going to be the next Nvidia. And it was quite clear that. Our models hadn't quite picked up in this emerging opportunity. We were actually poorly exposed to the companies that were rallying on the back of the Nvidia earnings.
And so, we went back and we asked ourselves the question, who are the other companies that are going to be like Nvidia? That are going to be able to monetize this opportunity in the near term? And who are the ones that are saying they're doing it, but maybe are just riding the wave? And we were able to answer that question by going to our data. So we looked at two year’s worth of earnings called transcripts. We looked at two year’s worth of online job postings and hiring, and we identified the companies that had been talking about artificial intelligence and hiring for schools, occupations, talents associated with artificial intelligence. And we identified the companies that weren't doing that, but essentially said they were doing it in their Q1 earnings call and that enabled us to navigate the evolution of that secular theme, it became a very important driver of return dispersion across the U.S. equity market to ‘23 and a lot of 2024.
Fast forward to this most recent event, clearly the questions we're asking ourselves right now are, who are the companies that are going to be the most exposed to trade tensions to tariffs, and who are the companies that are somewhat immune?
And again, we've been able to go and query the data stack that we have to answer that question. Now, this has been a little bit more challenging 'cause ultimately the question of tariffs in trade comes down to costs in manufacturing and typically companies don't give you a lot of information about where they incur their costs and where their operations are based. They'll tell you a lot about where they're selling, but you don't get that cost analysis.
And so we've been able to go back to the data, and we've been looking at data sets such as geolocation data, online job postings- that has enabled us to identify that relative to sales in the U.S. where companies are hiring, where companies are present, where they're potentially manufacturing, where they're based, versus maybe for example, companies that sell a lot in the US but have a lot of their operating costs or evidence of their operating costs in other countries.
Shipping data gives us a sense for what companies are importing from overseas into the us. Versus the ones that are more reliant from domestic production. And so, analyzing the data in that way, we've got a sense for where, American companies operations are relative to their sales versus those that are maybe more exposed internationally to production bases and supply chains.
And if I look at the types of signals that have navigated this recent episode. very well. Those have given us a fantastic edge and being able to query a very expansive data set that we've been investing in over the last 15 to 20 years has been able to navigate these very changeable markets, that we've seen now for coming up in 60 months.
Oscar Pulido: You mentioned that one of the recent market volatility maybe some past episodes, is just how unprecedented in fact use of the word ‘unprecedented’ is overused. It goes show just how unique of a an environment we're living through what you're touching on that there have been then prevailing and innovations in how your team uses analyze some of periods that we're living I think those are some of the examples you're mentioning?
Rich Mathieson: Absolutely. And I think the big change that we've seen in our approach is just the need to be a lot more dynamic in how you're using the data and the questions you're asking the data. Essentially bringing in an element of dynamism into your research process to make sure that at all times it is very market aware, it is reflecting whatever theme is prevailing and making sure that you have some exposure to that, at least in your portfolios, even if it's a, a worst case scenario, just a risk control to make sure that you don't have any gaping holes that you're exposed to.
Oscar Pulido: And so Rich shifting gears a little where we are now in current how are you interpreting data or what is the data telling you about the range of potential outcomes for markets the economy and policy?
Rich Mathieson: In terms of very high level, I would say through the first quarter of the year, a lot of our top-down macro models did start to move slightly more defensive. here I think the more traditional macro models are looking at, vectors of returns across all asset classes, equities, fixed income, credit. We're overlaying that with the most recent economic releases, and then we're taking all of the current data and saying what period historically most resembles what we're currently seeing.
Now as we came into 2025, a lot of that analysis was pointing to a fairly mid cycle constructive regime. I would say, if anything, it's starting to look a little bit more late cycle. And so, we had already been moving portfolios to be a little bit more defensive, So buying up defensive, large cap size, selling down high risk, high volatility.
I think I would say currently if you look at all of that traditional data, and you put it together and you flip it on its head, and you look at the current data, and look at the data that prevailed six to 12 months before every recession, you can reverse engineer a probability of going into a recession in the next six to 12 months, that has gone up, but based on the traditional data, it still looks somewhat muted, somewhat benign.
Having said that, we're very aware, the speed at which the world has changed is probably a lot more rapid than we've seen in previous episodes. And so we're continually monitoring, I would say higher frequency data, for example, go back to online job postings, gives, it's a good sense of we are starting salary levels are moving and we're seeing some evidence that wage inflation, that consumers have benefited from is maybe starting to roll over. And it's actually maybe some evidence of it starting to roll over where it really counts in the high-income brackets. But nothing that gives us too big a cause for concern just yet.
So for the time being, we're still recession, not the base case, but we're very focused on a lot of that higher frequency data to give us an early sign of where the core, top-down models might move towards.
Oscar Pulido: So, recession is not base case is starting to the data is starting to tell that maybe that's a more likely scenario than it was at the beginning of the year. Notwithstanding that, Rich, plus the fact you've had volatility, one of the messages that we've been conveying some of our recent episodes around this period of market volatility is the need to stay invested but perhaps what you're invested in starts to change in this environment. What are some of the investment opportunities and your team are seeing?
Rich Mathieson: Yeah, I think in the near term, we've got volatility now stabilizing to a certain extent at reasonably high levels. If we look at, three, six months from now, something that I'm reasonably excited about is, you are starting to see the concentration in global equity markets break down to a certain extent.
I mentioned earlier, some of these highly profitable, large cap tech companies that have led markets down through this episode that is improving the breadth of the overall market. But in all honesty, a world where being long seven stocks, and short everything else as the right answer, doesn't really lend itself too well to a systematic approach that is really designed to exploit a much broader opportunity set across global equity markets. And I think as we go forward from here, I would expect to see breadth in the US market improve. That will follow, what we've already seen in areas like Europe and Japan, and that has significantly improved the opportunity set just to identify the winners and the losers in those markets. I fully expect the US market to follow as we move beyond this latest episode, breadth will improve and the opportunity set for stock selection will improve.
Oscar Pulido: Right, more breadth means more opportunities for active managers such as yourself to try and. outperform some of the benchmarks that maybe in the past couple years have been a little bit more difficult to outperform because of the narrowness of companies that have been outperforming that benchmark.
Rich, it's clear from listening to that we're in unprecedented times to use the term, and the volatility that is something that has a lot of historical precedence. You also mentioned that one of the observations in markets recently was that the areas of the market that traditionally served as safe havens or flight to qualities have behaved a little bit differently than they have in the past. So, what does this mean for portfolio construction when we think about the path forward?
Rich Mathieson: In terms of just equity portfolios, we've had to work harder to identify the sources of defense. I think more broadly from an asset allocation point of view, you just had two years of 20% plus returns in the S&P 500 that's very unusual and I think, we'd already started to see before this recent episode, I think capital market assumptions being revised down. and the way that that's played out for our platform is we've seen growing demand, this maybe a shift in, in allocation coming back the other way from passive investors being prepared to embrace active management again.
So, we've seen investors start to embrace active management, just move up the risk curve a little bit, to capture that driver of return. I think the other aspect, and I think this comes back to the heart of your question, Oscar, the other aspect of capital market assumptions that has been changing, and I think this goes back to what we saw even in 2022, which was maybe arguably the most similar episode to the one that we've seen currently, the diversification investors can expect to obtain by allocating traditional asset classes, namely equities and bonds has been revised downwards. And again, you've seen a period recently where both of those asset classes have been losing money at the same time.
And that has led many of the investors we speak to, to embrace or look for alternative sources of diversification, alternative sources of ballast in their portfolios, that can produce a very uncorrelated source of alpha. Even in markets that are going down, as we've seen so far, year to date.
Oscar Pulido: Well, rich, we know that investing is very emotional exercise for, a lot of investors, and it's always reassuring to hear when, people like you and your team are really looking at the data to make sense of how to navigate these complex dynamics. You also mentioned Alpha, which is hard to generate but you're saying that now this is an environment where you think, is perhaps possible given some of the volatility that we're seeing in markets.
So Rich, thank you for sharing all this context with us, and thank you for doing it here on The Bid.
Rich Mathieson: You are welcome. Thanks for having me, Oscar.
Oscar Pulido: Thanks for listening to this episode of The Bid. Next week, Catherine Kress joins us to discuss the latest in geopolitics. Make sure to subscribe to The Bid wherever you get your podcasts, and don't miss an episode.
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