Investors have more than just a Fed Rate Hike and disappointing ECB announcements  -- this past week the market experienced some fairly dramatic shifts in it's underlying dynamics.


Broad Asset Classes
 

Volatilities increased across the board for broad asset classes, with only Foreign Emerging Equity experiencing a decline in volatility.

                                      RETURN                 vs.                   RISK               vs.           SHARPE RATIO

Tail risk, or risk of extreme events increased from a variety of directions.  Tail risk, independent of other asset classes, increased for every asset class with the exception of Foreign Emerging Equity.  Most noticeably, US REITs now has the highest risk of extreme loss of the major asset classes (see "Isolated Tail Risk" in the below chart).

When incorporating co-movement (asset correlations) using the Contribution to Extreme Loss, risk declined in Commodities, Foreign Emerging Equity, and Foreign Developed Equity.  However, it's again important to note that US REITs, with their increased correlation to US Fixed Income, is now the greatest source of tail risk when combined with these other asset classes.

             

      RISK OF EXTREME LOSS    vs.   CONTRIBUTION TO EXTREME LOSS

Because higher rates reduce the value of fixed coupon payments, REITs and US Fixed Income have seen an increase in correlation over the past week as a likely Fed hike draws near.    An increase from near-zero correlations to over 25%, means that US REITs is now officially the riskiest asset class in the portfolio, exhibiting not only the greatest Risk of Extreme Loss, but all the greatest Contribution to Extreme Loss (that incorporates correlation).  US REITs have been highlighted below, to show the progress in correlations to other major asset classes over the past 3 weeks.

 WEEK 47 CORRELATIONS    vs.   WEEK 48 CORRELATIONS    vs.   WEEK 49 CORRELATIONS

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