Portfolio managers often preach the benefits of diversification to their clients. While asset values are unpredictable, holding a diversified portfolio allows an investor to benefit from divergent moves in different assets – thus, reducing the overall volatility of the portfolio.
It may work that way in theory, but so far this year asset prices that are supposed to have little correlation have moved in near lock-step with each other.
Equity markets across the globe have rallied strongly, with the S&P 500 returning more than 9% and international and emerging markets have fared even better, with increases of +15.2% and +19.2% respectively. That performance would seem to indicate a more optimistic outlook for global economic growth among investors. Donald Trump’s election in the United States is hoped to bring regulatory and tax relief to corporate America that would both directly benefit companies in the country, but also produce higher growth. As of yet, those hopes have yet to materialize in actions.
Long-term bonds are generally purchased for their safety in comparison to equities. As the economy weakens, long-term bonds become more attractive as both a safe asset and in expectation of future loosening from monetary authorities. As such, the total return from long-term bonds often moves inversely to the total return from equity markets. However, in recent years the relationship has vanished as Federal Reserve policy has been a major factor in markets.
Gold and silver are usually bought in times of crisis or high inflation. Gold prices are 12% higher this year, while silver prices are 11% higher. The Trump presidency in the United States has certainly raised questions about predictability and precious metals have perhaps caught a bid as insurance against an unexpected political outcome. This year has also seen increased tensions on the Korean Peninsula and a spate of European terrorist attacks.
At some point, something will likely give. With equity prices at highs, interest rates set to rise, and a softening economy, the problem is the impossibility of knowing when.
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