A Market in Motion: Stocks, Bonds, and the Search for True Diversification

Welcome to our latest market insights update. We’re diving into some of the biggest trends shaping our investments today—market concentration, record-high money market assets, the bond yield landscape, and one of the biggest challenges for investors: the unprecedented correlation between stocks and bonds.

January’s Market Performance: A Strong Start and What It Means

There’s an old market adage: As goes January, so goes the year. Historically, when the market starts the year with gains, the odds favor a positive outcome for the rest of the year.

This year, the market gained 2.8% in January—a potentially encouraging signal. Looking at data since 1926, a positive January has historically led to an average 12.8% gain over the next 11 months, with markets finishing higher 80% of the time. Conversely, when January is negative, average returns tend to be lower at 7.6%, and the chance of finishing the year down increases to 39%.

That said, history isn’t a guarantee. Take 2018—despite a strong start, markets ended the next 11 months down nearly 10%. The mid-2010s also saw years that began in the red but recovered strongly by year-end. While seasonal trends provide useful context, they don’t override broader market forces.

Market Concentration: Are We Seeing a Shift?

For the past few years, market leadership has been strikingly narrow, dominated by a small group of mega-cap stocks. In 2023, these top names posted outsized gains, averaging over 111%. While their performance slowed to 60% in 2024, they still led the way.

However, early 2025 data suggests a potential broadening of market participation. In January, this leading group actually underperformed relative to the broader market—a shift that, if sustained, could signal a healthier, more balanced equity landscape. Strong market breadth is key to long-term stability, as relying on just a handful of stocks to drive returns isn’t sustainable forever.

A Wall of Cash: Record Money Market Assets and What Comes Next

Investors are sitting on an unprecedented amount of cash. As of December 2024, money market fund assets hit $7 trillion—far exceeding previous peaks, including $4.8 trillion during the pandemic and just $3 trillion in 2018.

Why does this matter? Historically, when interest rates decline, cash tends to flow back into equities and fixed income, potentially driving prices higher. However, today’s market looks different from past cycles—valuations are higher, and economic conditions are evolving. Investors should consider how this massive pool of sidelined capital might influence asset prices if rate cuts materialize.

The Bond Market’s Silent Shift: Real Yields Are Back

Fixed-income investors have spent years battling low (or even negative) real yields. But today, real yields—bond yields adjusted for inflation—are at their most attractive levels in a decade.

Focusing on five-year Treasuries, we see real yields still above 1%, levels not seen since 2015. Historically, higher real yields have correlated with stronger bond returns over the following 12 months. If inflation remains under control and rates stabilize, this could create a compelling setup for income-focused investors.

The Stock-Bond Correlation Challenge: Finding Real Diversification

One of the biggest stories in today’s market isn’t just about returns—it’s about correlation. The traditional playbook has long assumed that stocks and bonds move in opposite directions, providing a natural hedge within portfolios. But that’s not what we’re seeing.

As of January 2025, the stock-bond correlation reached 0.72—the highest level in nearly 100 years. Simply put, stocks and bonds are moving together more than ever, reducing the effectiveness of the classic 60/40 portfolio.

The data is striking: in the last 14 months where stocks lost money, bonds also posted losses—a streak never seen before. In some cases, bonds actually fell more than equities during downturns, challenging the assumption that bonds provide stability during equity selloffs.

Where Do Investors Find True Diversification?

With stocks and bonds moving in tandem, investors seeking real diversification may need to look beyond traditional asset classes. Historical data shows that certain alternative strategies—such as equity market neutral funds—have provided both low correlation to stocks and strong risk-adjusted returns.

For instance, in the 14 months where stocks and bonds were both negative, select alternative strategies posted gains, demonstrating their potential as portfolio stabilizers. Of course, diversification isn’t just about reducing risk—it’s also about maintaining return potential. Striking that balance is key in a high-correlation environment.

A Long-Term Perspective on Portfolio Construction

Markets go through cycles, and while today’s environment presents unique challenges, investors who take a strategic, diversified approach tend to fare best over the long run. Historically, alternative investments have delivered stronger returns in periods of high stock-bond correlation, particularly when interest rates are elevated.

As the market landscape evolves, staying disciplined and adaptive will be crucial. A well-constructed portfolio isn’t just diversified on paper—it should be built to withstand different market conditions while keeping long-term objectives in focus.

Final Thoughts

That wraps up this month’s market insights. As always, staying informed and taking a thoughtful, data-driven approach is the key to navigating uncertain markets.

Thanks for reading, and we’ll be back next month with more insights on the trends shaping global markets.