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  • Writer's picturePatrick Ling

Is Asset Allocation Dead?

2022 will go down in history as the year asset allocation failed. I've attached the historical 60-days correlation between two traditional diversifying assets (IEF & GLD) and SPY.


Historical correlation between SPY and IEF/GLD
Historical correlation between SPY and IEF/GLD

You can see that there have always been instances in the past when both assets have a high positive correlation with SPY. However, they do not happen at the same time except for May 2021. The other saving grace is that the correlation peaks all happen outside of crisis periods which are the shaded areas. In 2022, the worst possible scenario happened. Both assets' correlation with SPY shot up at the same time and it happened during a crisis.


Not All Doom & Gloom


There are good fundamental reasons why US treasuries and Gold are uncorrelated with equities. You can refer to our previous posts on Gold and US treasuries. But there will be periods when correlation turns positive. However, I do not believe this is a permanent condition. Therefore, if there is any good news, it is that both correlations are now near their respective historical peaks. If the peaks hold, we might see both correlations start to revert to their long-term average and the diversifying benefits will come back eventually.

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