Correlations Snap Together

There are two things Nick Colas and the strategy team at ConvergEx seem to watch very closely to gauge the condition of the markets. One is the Vix of each sector and the other is the correlations between both sectors and other asset classes.

In his note this morning, Jurassic Park Market, Colas tells us that intra-sector correlations within the S&P 500 have shot up over the past 30 days from 69 to 75%. This is a far cry from the 95% correlations we lived through during the 2011 “risk on, risk off strobe light”, but still a fairly rapid increase.

Dramatically higher correlations are also being witnessed in other asset classes, as developed markets overseas, emerging markets and even high yield corporate bonds get more and more S&P-like every day…

Among foreign equities, Emerging Market stocks saw the larger pop in correlation to U.S. equities, going from 36% last month to 84% over the last 30 days.  Equities in Europe/Asia/Far East (EAFE) develop markets showed a 68% correlation to the S&P 500, versus 46% the month before.

In the world of corporate bonds, high yield securities traded more like stub equities than bonds, registering a 67% correlation to stocks this month.  That’s a big uptick from the coupon-clipping 25% correlations of last month.  By contrast, high grade corporates continued to be a good diversifier, with a negative 22% correlation to stocks.

Precious metals continue to shine (sorry…) as the one asset class where investors can get some diversification regardless of other market dynamics.  Even as most other financial assets clustered more closely together over the last month, gold saw a negative 19% correlation to U.S. stocks, and silver had a negative 13% correlation.


Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York.

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