Why are correlations no longer what they used to be in the markets?

Almost all stock markets are at their historic highs, or have reached them in the last ten sessions.
Piazza Affari is no exception and stands at 2008 levels, but is still well below 2000 levels.
Has anyone missed this not entirely negligible detail? It took Milan 16 years to regain the previous values of 2008, but there are still 15,112 points to go before returning to the levels where we were in 2000.
Not a little! In the general euphoria we often forget about underwater periods, i.e.
how long the period in which one can be "soaked" can be if single indices or single securities are used, outside the logic of the Portfolio.
Look at how Gold glitters, around 2160 points.
But how many know that the longest underwater period of the yellow metal was 27 years, from January 1980 to June 2007? But did investing in Gold in January 1980 really mean having to wait 27 years to see your money again, among other things in nominal value? It depends because, if you are invested through a diversified portfolio, the individual indices, even in their more or less long negative phases, can create value in terms of reducing the risk of the entire system, and this translates into a better result than each individual instrument and asset used, if evaluated in the investment period that has been measured and established.
This is the difference between purchasing, perhaps chasing yield, individual securities and, instead, equipping yourself with a robust and well-diversified portfolio.
Furthermore, today we finally find (after the rally in the last quarter of 2023) the bond markets with falling yields and in the overbought phase and, if we want to wander, bitcoin has also risen to record prices.
Not that I'm interested, I studied it and despite everything I didn't understand its meaning, but it's to give an overall picture.
It is therefore obvious that no one today wants to see the clouds gathering over some more or less relevant issues such as, just 12 months ago, the risk and rescue of an American Regional Bank (BANCORP) which, in a single session, lost 40 % of the value and, like a year ago, it found a valid ally in the US Treasury Secretary, given that it immediately raised foreign funds for over 1 billion and averted bankruptcy.
It would seem that one is no longer free to fail, and it does not depend on the size of the banks, if we remember the story of Credit Suisse, not exactly a country banquet.
And there is still talk of the mythological Bail In, never applied anywhere in the world.
During the week, both the FED with Powell and the ECB with Lagarde left rates unchanged and, although inflation and growth were also revised downwards, particularly in Europe, it was not deemed necessary to intervene on monetary policy, where the current rates are seen as adequate to the objectives of achieving the inflation target.
The news had been awaited for some time now, and the response of the markets on the day of the ECB (Thursday 7th) instead sees the Italian ten-year bond finally returning to values below 3.6 with a drop of 2.40% and the Treasury settling at around 4 %.
And the stock markets are there to reach new highs.
What is the reason for this response which seems unjustified? Simply due to the fact that inflation is still decreasing compared to what was observed in January, mainly due to a lower contribution from energy prices, and Central Banks seem to be effectively finding a valid balance between Growth and Inflation.
So everything is fine, despite the current levels of the indices? But if all this is true, why does Gold continue to set new records and is at its historic highs? As Lorenzo Ippoliti, an expert in financial market research, recalls, Gold is seen as a safe heaven that moves inversely to risky assets, but the correlation today is evidently different.
Gold can be included in many portfolios precisely because of its function as a safe haven asset and, when everything goes wrong, that percentage generally between 7% and 10% can perform its protective function.
But note the graph below, with the evidently positive correlation between Gold and S&P 500, taken from the period lows of October 2023 to today: What could be due to this trend, which to many will seem anomalous? As the aforementioned author reminds us, on the one hand there are purchases by central banks, but then also by those who fear a debasement of the financial system, i.e.
the risk of reducing the value of the currency, due to gigantic expansionary fiscal policies financed by debt, mainly due to the increase in military spending.
Typical of war times, unfortunately.
In parallel, we have been noticing for many months large purchases of gold by non-Western central banks, such as China, which in this way diversify their reserves.
It should be said that the correlations are no longer what they once were.
And if this is true in general since they change over time or, as they say, are not stable, probably between Equity, Bond and Gold the correlation will continue to be positive at least until a new equilibrium is found, which could be the achievement of the inflation targets despite the absence of a recession, albeit a soft one.
What do we learn from all this? Since no one can predict the future, which is uncertain by definition, a Diversified Portfolio tends to protect our invested assets, although it does not always work on all assets, as happened in 2022 in a negative phase but as is also happening now, in a positive period for all Assets.
At the beginning of November, I wrote (we had just had two days of positive stock market trading) that the Bond market will drive equity and then, if you remember, I wrote in conclusion: Don't call it a rebound.
And in fact I was right.
also read 5 stocks with dividends that yield more than BTPs