Back in March, we conducted our first time-series analysis of the correlations among global asset categories. It was a fairly labor-intensive endeavor, requiring not only the initial design of the algorithms, but about 1.5 billion individual computations. Like every first-time project, it took us longer than we thought. (That is why our preliminary post on global correlations was dated late February, but the data was current as of two weeks prior. It was a slow process. Please see those posts for further descriptions of the data and how to use these exhibits.)

Once we start trying to solve a puzzle, though, it becomes like making a point to ourselves: We can’t let it go.

The second time around was much easier… Roughly the same number of calculations, of course, but with the number-crunching and graphics-creation procedures up and running, the process itself wasn’t mentally draining. It was a matter of sitting back and letting the processors whirl.

So what does the data tell us? There is some good news for equity investors — at least those seeking a hedge. Earlier this year, stocks were showing next to no correlation with any asset class except real estate, where the relationship was mildly positive (both equities and properties were falling). The recent performance of the U.S. stock market notwithstanding, a wider range of hedging opportunities exists within the global fixed-income, commodities, and currencies markets. There are more places, if not to hide, then to hedge.

Here is the updated matrix (top) and, beneath that, a new exhibit, which compares the current cross-category correlations with the previous set (i.e., from February).

Clearly, the biggest reversal in performance relationships has been between commodities and currencies. Back in February, those categories had the strongest negative correlation worldwide (-43.1%). Three months later, they have the strongest positive correlation (+65.8%)! We view this new relationship as an even stronger argument in favor of maintaining significant exposure to cash in the current environment. (In global-macro investing, cash doesn’t have to mean only U.S. notes.)

In the future, we realize that it will be helpful to see a performance exhibit, as measured over the same time period as the correlations, alongside these matrices. Another item on the to-do list, and we already have that data.

Again, see the previous posts (preliminary post, graphical exhibits) for discussion of the data set and how to interpret this type of analysis.

Please send us an e-mail if you want to license these exhibits, have them custom-modified for your own publication (small license fee), or are interested in having us apply these “graphalytical” techniques to your own data sets (consulting fee). ♦