An article on Bloomberg called our attention recently. The authors quote a research from Goldman Sachs contending that traditional safe havens (Gold, bonds, Yen) might not be appropriate diversifiers in a market environment such as the one we seem to be embarking: with volatility, rates and inflation all going up.
They called this lack of positive beta from traditional safe havens with the VIX and rates, "diversification desperation". Goldman's research also identifies Consumer Discretionary as a sector that has positive correlation with rates and might work well as a diversifier.
We decided to fact check the behavior of these traditional safe havens in times of market stress. Using our PortEngine API, and a few lines of code, we quickly created the table below:
|Shock 1: SP500 drops 5%||Shock 2: VIX up 30%||Shock 3: 10 year rates up 50 basis points|
|Consumer Discretionary (XLY)||-4.50%||+0.04%||+2.03%|
Each row illustrates a different unlevered portfolio with one security. For example: the first row contains 1 XAUUSD with a NAV of $1326.4 (spot price of an ounce of gold). Each column is a different shock.
Our results corroborate the findings from the article, but our numbers are all forward looking and not the result of a regression beta.
Going forward, traditional safe havens seem pretty ineffective in times of stress. Consumer discretionary seems to possess positive correlation with interest rates.
These results were obtained with our "fast" model, i.e. a correlation half-life of 6 months and a volatility half-life of 2 months.
Please let us know if you would like us to run your own portfolio with these scenarios to make sure your expected PL will be within acceptable bounds.