Diversify Differently

Higher volatility and economic uncertainty, as well as the use of increased portfolio risk to align return profiles with return targets, make portfolio diversification more important than ever. Diversification could be more difficult to achieve, however, as equity-bond correlation typically rises in more inflationary environments.

One-Year Rolling Correlation of Daily Returns, S&P 500 Index Versus U.S. 10-Year Treasury, as of January 7, 2022

Average U.S. 10-Year Treasury Return on Days When the S&P 500 Index Ended Down by 2% Or More, as of December 31, 2021

Source: Bloomberg. For illustrative purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Average Annual Real Returns to Commodities and Other Asset Classes During Four Different Growth-and-Inflation Regimes, 1970 – 2021

Source: Bloomberg, Federal Reserve Bank of St. Louis (FRED), Bank of America, Ibbotson. Data from January 1, 1961 to December 31, 2021. Stocks are represented by the MSCI World Index (backfilled with the S&P 500 Index by Ibbotson prior to Jan 1970); Government Bonds by the ICE BoA Global Sovereign Bond Index (backfilled with the Bloomberg U.S. Long Term Government Bond Index by Ibbotson prior to Jan 1986); Corporate Bonds by the ICE BoA Global Corporate Bond Index (backfilled with the Bloomberg U.S. Long Term Corporate Bond Index by Ibbotson prior to Jan 1997); and Commodities by the Bloomberg Commodity Index. Inflationary regime is defined by the year-over-year (YoY) percent change in the OECD CPI (backfilled with the U.S. CPI prior to Feb 1971). Bust and boom regimes are defined by the change in the level of OECDGDP compared to the previous year. If the current YoY GDP minus the YoY GDP lagged one year is less than zero, it is considered a bust regime and vice versa. If the current YoY CPI minus the YoY CPI lagged one year is less than zero, it is considered a deflationary regime and vice versa. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Investment Ideas

Fully flexible approaches to fixed income and credit

Short-duration credit

Uncorrelated markets and strategies

Inflation-sensitive real assets

Inflation-protected and floating-rate securities

Tail-risk hedges

Outlook: Adapt to Today’s New Challenges

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Returns: Mind the Gap

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