REITs Are Moving in Lockstep With Stocks

Given the continued volatility in almost every market these days, it might be helpful to revisit some basic correlations between asset classes. As you might recall, correlations indicate how likely one asset is to move in a linear fashion with another. To properly diversify a portfolio, investors should look at combined investments that are not highly correlated. As we saw last year, it didn’t matter if you owned international small-cap value and large-cap growth — when stocks fell, they all fell.

Among stocks (U.S., non-U.S. and emerging market), bonds, gold and REITs, gold continues to be the least correlated to stocks, showing a scant 0.19 relationship to U.S. stocks, 0.01 relationship with global stocks and 0.05 correlation with emerging-market stocks. This makes gold a good bet right now for someone looking to add an asset that won’t move along with stocks.

Most surprisingly is REITs, which for many years were touted as an effective way to diversify a stock portfolio into a separate asset class. So far in 2009, REITs show an impressive 0.85 correlation with U.S. stocks, meaning publicly traded real estate is moving in near lockstep with the market at large.

2009 Correlation of Returns:

Source: Rosewood Research

Milton Friedman died almost three years ago, and given the socialist coup that’s been undertaken in this country over the last year, there’s little doubt Friedman is turning over in his grave. Even before the bailouts, AIG, Freddie/Fannie and Bear Stearns were not examples of free-market economics and are even less so now. In our current age, capitalism is seen as the problem, not the solution.

In this classic Donohue clip from 1979, Friedman deftly answers criticism that capitalism somehow creates economic hardship, a charge frequently made by politicians now intent on “spreading the wealth around.” And at a time in which corporate greed is commonly charged assailed as the culprit, Friedman questions the now commonly accepted notion that political self interest is nobler somehow than economic self interest.

Should Treasury Secretary Tim Geithner take the rap for the current economic maelstrom? While no one single individual can be blamed for the collapse, there’s no question that Geithner, as we pointed out when he was first nominated, has spearheaded the now-disastrous bailout efforts from the start.

If you’re pissed about the AIG bonuses, it’s Geithner you should be angry with. It was the Federal Reserve Bank of New York, under Geithner's leadership, that authorized the first $85 billion infusion into AIG back in September of last year. That figure has since grown to double that amount, for those keeping score.

Recently active on Intrade.com, the real-time, real-money political futures market, is the contract gaming the odds of Geithner losing his job, either by resigning or being replaced. Odds makers are showing a 12% chance of Geithner leaving before the end of June 2009 and a 30% chance of him being gone before the end of the year. Both have roughly doubled since the beginning of the month.

Odds Tim Geithner will depart as Treasury secretary:

Before June 30, 2009:


Before December 30, 2009: