Funky Correlations and Missing Links from David Bowers
Asset allocation has been relatively straightforward in the last 20 years with the negative correlation (-37% based on daily changes) between Bonds and Equities providing a ready ‘hedge’ for bulls and bears. The new policy regime, post Covid, is beginning to challenge this: the correlation in the past 3 months is a positive correlation of 44% - the highest level in 20 years.
65-day correlations are volatile and this could be a blip. But could this be an early sign that the inflation risk premium is starting to be priced back into financial markets? Maybe US Treasuries are no longer as safe an asset as they were: the risks of a 3% drawdown or more is now greater for Bonds than Equities.
The note illustrates cross-asset cross-checks / models for Stocks vs. Bonds, for US bond yields, for Gold, for Japanese equities and for International vs. US equities.
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