President Chaos

I was reading an interesting article on how the stock market in the US is different now than it was prior to the election of Donald Trump. 

The US equity market is very different than before Election Day 2016, and that’s not just because we are at fresh all-time highs. There were plenty of new highs from 2013-2016, after all. What’s different is the lack of sector and asset class correlation now versus 2009 – 2016. Simply put, they are finally back to normal. The drop in correlations among the 11 sectors of the S&P 500 has been profound, from 75-80% pre-Election to 57-62% afterwards.

Within any index, there are a sub-set of 'sectors'. The S&P 500's eleven sectors are shown above, and the FTSE 350 has a less compact 41, but the principle is the same.

From 2009 - 2015, correlations between the S&P 500's eleven sectors rarely dipped below 80% meaning that it mattered little in which sector you were invested:

Own everything or nothing, give or take. The hedge fund guys absolutely hated it, blaming the Fed every chance they got for rendering the type of analysis they had been doing since the 1980’s and 1990’s no longer useful.

This rather nicely supports my opinion expressed on multiple occasions, that trying to beat the market is an exercise in futility, and that buying a low-cost index tracking fund is the way forward, but the article suggests that with sector separation back, opportunity knocks for the active managers.

This trend also applies to non-IS equity markets, which "have been tied at the hip to US stocks since the Financial Crisis as well, but now correlations for the EAFE (Europe, Australasia, Far East) country stocks to the S&P 500 are 61.4% and for Emerging Market equities it is 34.6%". 

It’s kind of funny that President Chaos has succeeded in “normalizing” market conditions. I suppose this is what happens when the Federal Reserve and its programs become back page news after being the dominant (only?) story for almost a decade.

For the active managers, no more excuses. Show us what you got.

It'll be interesting to see whether this separation holds up over the next couple of years and how active managed funds compare to index tracker funds. 

I'll be sticking to the latter, although at my age, conventional wisdom tells me I should be reducing my exposure and moving rapidly from stocks to bonds.

From CNN Money:

The old rule of thumb used to be that you should subtract your age from 100 - and that's the percentage of your portfolio that you should keep in stocks. For example, if you're 30, you should keep 70% of your portfolio in stocks. If you're 70, you should keep 30% of your portfolio in stocks.

Fortunately for me, the new rule of thumb suggest that the number should be 120 but if I can live to 140, I should be just fine.