Amazing Visualizations Of Asset Market Correlations

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Photo: Marc to Market

Take a look at this Great Graphic.  It is some interesting work by a former colleague at HSBC, Stacy Williams.  These large correlation matrices.  The first is from 2005, pre-Lehman.  It is hard to call that period normal as, it is clear, with the benefit of hindsight, that the seeds of the crisis were already planted.  The second is from this month.The red colouring represent high correlations between asset classes.  The blue ae strong inverse correlations.  The other colours denote weaker relationships. 

Click on the charts to enlarge them.  The important take away is of course that there is a great deal more red on the lower chart, showing that many asset classes are more correlated than previously.  Among other things this makes the Holy Grail of investing, namely diversification, more difficult to achieve.

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Photo: Marc to Market

In the foreign exchange market, we have noted, a breakdown in the euro’s correlation with the US S&P 500 from a record 0.85 in early December 2011 to a low of last week of 0.43 (60-day % change). Read more posts on Marc to Market »

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