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Chart toppers: Diversification, China and the Fed’s dual mandate

By Advisor Perspectives
Capital Markets

Key Points

Diversification is always (and especially now) essential
Does the linkage between the U.S. and China’s markets reflect economic reality?
Uncertainty around Federal Reserve (Fed) policy is heightened by its dual mandate: inflation and employment

From time to time, instead of diving into a singular topic in these reports, I am going to do a“Chart Toppers” review, where I share some of the more interesting and relevant charts I’ve put together or seen on a variety of topics.

In this first installment, I am going to highlight the merits of diversification with a slightly different take on a popular visual used in the investment management business for quite some time. Next I’ll hone in on the relationship between the US and Chinese stock markets and economies. Finally, I’ll try to spin a slightly different tale on the Fed’s two mandates: inflation and jobs.
Diversification—an essential tool for investors’ financial (and emotional) well-being
The chart below, which I often refer to as the asset class “quilt” chart, is a popular one used by a variety of investment management firm over the years. The common structure of this visual is to show a variety of asset classes from year-to-year, highlighting how they move in and out of favor—often the best performer in one year falls toward the bottom in the next year, and so on.

What I thought would be interesting, given how volatile (and frustrating) the markets have been this year, would be to just look at 2015 to-date and rank a number of broad asset classes by monthly performance. As remarkable as these quilt charts look when ranking asset classes year-by-year, it’s even more remarkable what’s occurred this year.

Wild Performance Swings This Year

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc., *as of September 30, 2015. Asset class performance represented by annual total returns for the following indexes: S&P 500® Index (US Lg Cap), Russell 2000® Index (US Sm Cap), MSCI EAFE® Net of Taxes (Int’l Dev), MSCI Emerging Markets IndexSM (EM), MSCI US REIT Index (REITs), S&P GSCI® (Commodities), Barclays U.S. Aggregate Bond Index (Core US Bonds), Barclays U.S. High Yield Bond Index (High Yld Bonds), Barclays Global Aggregate Ex-USD TR Index (Int’l Dev Bonds), Barclays Emerging Markets USD Bond TR Index (EM Bonds). Past results are not an indication or guarantee of future performance. Returns assume reinvestment of dividends, interest, and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly.

As you can see at first glance, there is no discernible pattern. In fact, look at the first four months of the year. Commodities went from last place, to first place, to last place, and then back to first place…all just in the first four months of the year! Real estate investment trusts (REITs) had a similar pattern, but in the opposite direction. Commodities ranked at the top twice, while at the bottom four times; while REITs ranked at the top four times, but at the bottom twice. Small cap stocks also topped the rankings two months in a row; but during five of the other

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