Correlation Doesn’t Tell the Whole Story

January 13, 2012 | Tom Salemy, CFA, CAIA, Managing Director

This week’s Chart of the Week covers increased correlations among asset classes. Correlation is a statistical measure showing how two variables move in relation to each other. It can range anywhere from -1 to1, and refers only to the direction of changes. Perfect negative correlation (-1), implies that two items move in completely opposite directions and perfect positive correlation (+1), implies that two items move in lock-step. The chart above shows the five-year correlations between the S&P 500 and a broad set of sample asset classes. As evident, all risk-assets have had a very high positive correlation to the S&P 500 over the past five years. Referring to the chart, aside from the three Treasury indices, no other asset class has a correlation less than .90, which is extremely high.

However, correlation only tells part of the story: just because two asset classes have high correlation does not mean that their returns will end up being the same. In fact, this will most likely never be the case. For example, over the time-frame captured above, despite very high correlations, emerging markets, the S&P 500, and the REIT index have annualized returns of 2.8%, -.56% and -3.48% respectively. Over the past five years, as globalization has become more pronounced and economies more intertwined, correlations have certainly increased to all time high levels. But since correlation does not capture magnitude of returns, investors should continue to utilize an asset allocation model that takes potential risk and return into account.

Tom Salemy, CFA, CAIA
Managing Director

Get to Know Tom

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content

02.28.2024

Show Some Maturity

As interest rates remain elevated, some market participants have questioned the extent to which the maturity wall in the below…

02.22.2024

2 vs. 2000

A key metric that many investors use to measure the size of a company is market capitalization, which represents the…

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF. General description: Four-line chart plotting Treasury yield and spread since 1976. Chart subtitle: The current inversion of the Treasury curve has been aberrational in length and magnitude relative to history. Chart source: Bloomberg, Federal Reserve Bank of St. Louis as of February 14, 2024 Chart visual description: Left Y-axis labeled “Yield" and ranges from 0% to 18% in 2% increments. Right Y-axis labeled “Spread” and ranges from -300bps to 400bps in 100bps increments. X-axis labeled in YYYY format, from 1976 to 2023. 10-Year Treasury Yield plotted in dark teal line. 2-Year Treasury Yield plotted in light teal line. 2s10s Spread plotted in tan line. Inversion Demarcation (corresponding to right Y-axis) is plotted in light tan dashed line. Chart data description: Please contact us for the full dataset. End chart description. See disclosures at end of document.

02.15.2024

If the Treasury Curve Could Talk

While most of Marquette’s research is written in the third person, this edition of our Chart of the Week series…

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF. General description: Line chart showing down rounds in venture capital-backed companies. Chart subtitle: Over the last two years, there has been a noticeable increase in down rounds for venture-backed companies. Chart source: Source: Cooley GO as of September 30, 2023 Chart visual description: Y-axis labeled “Down Rounds as a % of Total” and ranges from 0% to 30%. X-axis labeled in quarterly increments, from 1Q21 through 3Q23. Down Rounds (% of Total) plotted in dark orange; average plotted in dotted light orange. Chart data description: Average at 9.6%. 1Q21 at 5.7%. 2Q21 at 2.7%. 3Q21 at 2.3%. 4Q21 at 0.4% (trough for period shown). 1Q22 at 3.0%. 2Q22 at 4.1%. 3Q22 at 10.2%. 4Q22 at 14.1%. 1Q23 at 15.5%. 2Q23 at 21.2%. 3Q23 at 26.8%. End chart description. See disclosures at end of document.

02.06.2024

Another (Down) Round

Venture-backed companies tend to be nascent and typically deploy investment capital in an effort to drive revenue expansion, often to…

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF. General description: Combination column and line chart showing index weight and performance for China and India. Chart subtitle: There has been a significant divergence in performance between Chinese and Indian equities over the last few years. Chart source: Bloomberg, eVestment, MSCI as of December 31, 2023. Chart visual description: Left Y-axis labeled “Cumulative Return” and ranges from -25% to +150%. Right Y-axis labeled “MSCI Emerging Markets Weight” and ranges from 0% to 50%. X-axis labeled M/D/YY in six-month increments, from 12/31/15 to 12/31/23. EM Index weights are stacked columns, with China in light blue and India in light green, at the 6/30 increment for each year. China return is plotted in dark blue line and India return in dark green. Chart data description: Please contact us for the full dataset. End chart description. See disclosures at end of document.

02.01.2024

A Tale of Two Emerging Markets

While Chinese equities have largely languished in recent time amid robust performance of Indian stocks, it is important to note…

01.26.2024

2024 Market Preview Video

This video is a recording of a live webinar held January 25 by Marquette’s research team analyzing 2023 across the…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >