We're All Correlated Now

Lockstep

Lockstep

Lockstep

Main Entry:
lock·step
Pronunciation:
ˈläk-ˌstep
Function:
noun
1 : a mode of marching in step by a body of persons going one after another as closely as possible 2 : a standard method or procedure that is mindlessly adhered to or that minimizes individuality
— in lockstep
: in perfect or rigid often mindless conformity or unison <politicians marching in lockstep with the party line>

Bloomberg picked up on something that everyone who trades for a living already knows…correlation of asset classes has almost never been greater.

From Bloomberg via FT Alphaville:
The Standard & Poor’s 500 Index, whose increase in the past three months was the steepest in seven decades, is rallying in tandem with benchmark measures for raw materials, developing- country equities and hedge funds. The so-called correlation coefficient that measures how closely markets rise and fall together has reached the highest levels ever, according to data compiled by Bloomberg . . .

Listening to brokers and traders banter about their individual fave stocks on line at Chirpin’ Chicken at lunchtime, you get the sense that some market participants haven’t yet caught on to this, but most have.  I want to grab these guys and tell them how wide the rising tide is, and how futile it is to worry about the individual names right now…but then my chicken is ready, so I pay and I’m out like a scout.

Not all stocks are correlated, but many of the major sectors are moving along with the overseas trade, enough so that the indices themselves are dragged along for the ride in each direction. 

Also worth noting is that all of the hot themes have melded into one, from emerging markets to commodities to precious metals.  These groups are all moving in lockstep with each other as hedgies and growth mutual funds position themselves for an overseas recovery (they got bored waiting for the US consumer to fire up the credit card and head to the mall…ain’t happenin’).  If you run a long portfolio for a fund family, you gotta go somewhere and many managers seem to be in agreement that these are the sectors to own.

Just how high is the current correlation between stocks, emerging markets and raw materials?  Check it:

The correlation coefficient for the S&P 500 and the Reuters/Jeffries CRB index of commodities has been at 0.74 for the last 60 days. A value of 1 means perfectly correlated, but to give you the historical significance of a reading of 0.74 — it’s the highest correlation in at least five decades, according to Bloomberg.

And what of the fact that oil is moving so severely in tandem with the S&P 500?  And why are treasuries now moving with US stocks?

This is dogs sleeping with cats stuff, guys.  I have a guess or two on why this may be transpiring (centered around money flows rather than fundamentals) but The Why isn’t what matters.  The real question is The How Long.

Sources:

Investors Go Moo (FT Alphaville)

Treasuries Turn Tail (FT Alphaville)

Cash Best as Record Correlation Hints Collapse (Bloomberg)

Full Disclosure:  My commentary above is for informational purposes only, do not trade or invest based on anything you read here.

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