State Street SPDRs is out with some cool charts showing the very high correlations between two thematic issues of the day and their sector ETFs…
Take a look at the relatively small Metals & Miners index (the ETF is XME) versus inflation expectations:
Figure 1 shows the relationship between breakeven inflation rates and the S&P Metals & Mining Select Industry Index, which has a 0.94 beta1 to breakevens over the last five years — three times higher than the S&P 500 Index.
Here’s two-year Treasury yields (short-term rates) vs the popular regional banks index:
Higher interest rates may positively impact banks’ lending margins and the prices of regional banking stocks — an industry that has more of a lending focus than broader diversified banks. Figure 2 illustrates how regional banks have followed the path of the US 2 Year Yield, a rate that is most sensitive to Fed policy.
Josh here – now, of course, these correlations can loosen and even break apart given the extenuating circumstances in which investors are always forced to live. Sometimes, a given sector or industry’s worth of stocks will over-price the potential of something happening, like rising rates or looser regulations. The overshoot could lead to pain for those who jump into a theme too late.
But for now, yes, these are powerful correlations that show no signs of deterioration.