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New Correlation Meltdown Could Punish the Indexing Miracle

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You don’t need more reason’s than this to make sure your portfolio is diversified. Christopher Whittall writes in The Wall Street Journal that correlation among assets has fallen to its lowest level since 2006.

Developed-world stocks and bond prices climbed in the summer of 2016 on a belief weak growth would persuade central banks to keep their massive stimulus programs in place for longer. But as expectations cranked up for higher growth and less stimulus, differentiation made a comeback. Bond prices crumbled and stocks surged.

Markets that once moved closer together were parting ways. U.S., small-cap stocks outperformed large caps. Commodities remained resilient despite a rising dollar, which makes these assets more costly. Emerging-markets investments took a dive as investors anticipated greater protectionism following the election of U.S. President Donald Trump.

Past indications of lower correlation haven’t turned into a more lasting breakdown. But the vast central-bank stimulus that investors say spurred the correlations is either beginning to tail off, or is expected to, reducing its sway on markets, some investors say. That could create a rare opening for active-fund managers, many of whom suffered significant outflows in recent years as money migrated toward simple, low-cost, index-tracking funds.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.