Chief Global Investment Strategist at Charles Schwab, Jeffrey Kleintop, explains that the world’s stock markets move in sync with each other has fallen to the lowest level in 20 years and that enhances the potential risk-reducing benefits of diversification.
“Stocks are off to a strong start this year, but the bulls aren’t running in a herd. Bull markets can be found in the stocks of countries around the world, but their movements are less correlated with each other than they have been in the past 20 years. The change brings the return of an important diversification benefit for holders of globally diversified portfolios.”
“If sustained, this lower correlation—and the risk-reducing benefits of diversification it suggests as markets move more independently of each other—is particularly good news right now. Stocks may be due for a pullback given recent warning signs such as inversion of the yield curve.”
“The return to the lower average correlation across stock markets not seen in 20 years has the potential to offer globally diversified investors the benefit of less volatility without hampering returns on the path to financial goals—in essence decreasing risk without decreasing return.”