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Karsten and all,
In the reduced risk with leverage article, you mentioned that the portfolio may want to be adjusted based on the change in correlation seen between stocks and bonds.
What’s the best way to monitor changes in asset correlation in real time?
Thanks a ton for the wisdom!
@navypack That's a good tool. I like that you can monitor the monthly but also daily correlations. Thanks!
Thanks for sending that! Yes I definitely use that tool. Koyfin has some great data analytics too.
I’ll try to better get to the root of my question: tools look at correlation in historical hindsight. But if we’re adjusting our portfolio based on correlations, how can we guide our portfolio for upcoming correlation?
Should we be comparing short term correlation trends. Or stick to multi month trends and just weather a little more volatility in the interm?
For instance, stocks and bonds have historic inverse correlation (disclaimer: at times), but have lately been positively correlated. So to create an actual diversifier, assuming we want to be long equities, we’d have to go short bonds. How do we know when to flip this switch?
@lock We face the following tradeoff: Use short-term and you might get too many false alarms, i.e., correlation turning positive temporarily. Use the long-term only and you might not react in time when the normally negative correlation turns positive.
I'd use a zero or at most -0.1 correlation going forward for now. The Fed is the biggest threat right now. And that might turn the correlation even positive in the future if the inflation spikes continue.
Agreed. I’ve sort of landed on a positive stock-bond correlation outlook.
Here’s a cool white paper looking at past time periods when this has happened. Much more common than I had thought!
https://www.pgim.com/white-paper/us-stock-bond-correlation-what-are-macroeconomic-drivers