Three Charts to Read Fast Markets

As policy changes continue at a rapid pace, a closer look at the market’s foundations can help frame asset allocation decisions.

With market watchers and analysts struggling to keep up with the rapid-fire fiscal policy proposals coming from Washington, I’m reminded of Ferris Bueller’s advice, “Life moves pretty fast. If you don't stop and look around once in a while, you could miss it.”

Let’s stop, take a breath, and look around at three charts that can help explain the market’s non-political foundations — and frame potential structural asset allocation decisions.

US Exceptionalism and Concentration Has Ruined Equity Income Generation

The S&P 500’s historic run of dominance, led by just a handful of stocks, has resulted in the US making up roughly 65% of global market capitalization.¹  US stocks’ strong performance also has led to elevated absolute and relative valuations² — a trend frequently mentioned in the headlines.

Notably, US exceptionalism has also severely impacted the ability for flagship US stocks to generate sufficient levels of income. A less-covered byproduct of the recent run up in US markets, the trailing 12-month dividend yield of 1.23% ranks in the bottom 6^th percentile over the past 50 years for the S&P 500. And it’s only a few percentage points away from the all-time low of 1.09% reached back in March of 2000 (Figure 1).

A yield below that of inflation (CPI = 2.8%), a negative real income stream from US equities, has pulled the yield on global equities down to 1.7%.³  As a result, global stocks also now yield below inflation. And this is all a function of the US’s large market cap weight, strong run of returns fueled by high growth stocks, and ensuing low yield after prices have been pushed up. Global ex-US stocks have a yield of 2.9%.⁴

This low level of yield from stocks means investors have to look elsewhere for income, at time when an increasing large aging demographic base is seeking income as an outcome.

Investors are pursuing income with nontraditional equity strategies that use options to enhance income generation (i.e. Derivative Income) as well as active bond strategies. Derivative Income ETFs took in a record $35 billion in 2024 and active bond ETFs amassed a record $108 billion in 2024.

Diverging Trends in Credit

Credit spreads for fixed rate investment-grade and high yield bonds are both trading 46% below their historical averages.⁵ Spreads between rating bands (e.g. AAA to AA, AA to A, A to BBB, and BBB to BB) are also compressing, leaving less difference between them.

All this might indicate that credit markets are trading in unison, driven by the same factors. But that’s a naïve assessment of today’s credit market. There are differences, notably between the below investment grade fixed rate high yield and floating rate bank loan market.

Despite both markets being up over the past year, the rolling one-year correlation of weekly returns between those two markets shows how their return patterns have become significantly differentiated. In fact, the correlation between the two is in the bottom 1^st percentile over the past 20 years (Figure 2).

Overlay the US 10-year yield on top of this correlation trend, and it’s apparent that rate trends are driving this difference. Since bank loans are floating rate, their returns aren’t dictated as much, or at all, by the recent gyrations in interest rates.

But fixed rate high yield returns can still be impacted by shifts in the interest rate market — particularly when spreads are tight and priced for perfection, leaving the coupon and its sensitivity to the prevailing market rate to be a larger driver of returns (i.e., the basics of duration pricing).

The above trend shows that rates are driving high yield returns more than usual now, a fact underscored by the correlation of high yield and the very rate sensitive investment-grade corporate bond market sitting in the 85^th percentile.⁶

But the positive profit and economic cycle are supporting risk assets (i.e., credit), so a credit overweight is warranted. And that may be one reason for sizable inflows into credit vehicles with less rate risks. Bank loan & CLO ETFs had record inflows in 2024 and last month as well.

ETFs Win the Capital Gains Fight, Again

US-listed ETFs took in a record $1.1 trillion last year, while US-listed mutual funds suffered $400 billion of outflows⁷  — all in a year where stocks, bonds, and commodities were up. In fact, 2024 was the second consecutive year when the standard 60/40 portfolio outperformed cash.⁸ Still, mutual funds had outflows.

Maybe market direction didn’t have anything to do with those outflow. Maybe they were driven by structural trends related to tax efficiency. After all, 43% of all mutual funds issued capital gains dividends last year. Meanwhile, only 5% of all ETFs paid capital gains. Plus, over the past decade ETFs have won the cap gains battle every year (Figure 3).

The same trend exists when looking just at active; just 8% of active ETFs paid capital gains versus 43% of active mutual funds.⁹  And 2024’s numbers stay in favor of ETFs once the figures are asset weighted too. Calculating the percent of assets in each category that paid cap gains dividends shows just 0.77% of all ETF assets paid capital gains compared to 39% of mutual fund assets.¹⁰

Cost was another structural difference. The median expense ratio on an ETF paying a capital gain was 0.65% compared to 0.99% for a mutual fund paying capital gain.¹¹  The average fee for ETFs is lower, 0.57% compared to 0.87% for mutual funds.¹²

With this profile, another $1 trillion of inflows into US-listed ETFs in 2025 is reasonable. Especially with an above-average start in January and a pile of cash capital sitting on the sidelines that has now underperformed risk assets for two consecutive years. Putting some of that capital to work with ETFs should be considered.

Don’t Miss the Signal Through the Noise

It’s unlikely the frenetic pace of change will slow down any time soon. But focusing on the structural trends beneath today’s headlines can have a quantifiable impact on portfolios and investor outcomes like income, wealth accumulation, tax efficiency, and diversification.

Remember, markets move pretty fast. But if you don't stop and look around once in a while, you could miss something.

For more insights check out our market trends page.