I’ve written about asset correlation multiple times in the past three years. And guess what. We need to chat about it again. This time we’re dropping back to just the correlation between stocks (spoiler alert for my next follow-up article: Correlations are high for lots of assets right now, including crypto).
But for today, let’s just look at stocks. As you’re probably aware, one of the key thoughts that institutional money managers keep in the front of their minds is the diversity of a given portfolio.
We could dig into modern portfolio theory and other academic handwringing here, but this is the practical version: To most money managers (especially those with individual or retail clients), having a diversified portfolio essentially means that all the elements of the portfolio don’t go down at the same time. And right now, that’s getting tougher.
The Wall Street Journal published an insightful chart showing what has been happening with monthly correlation of stocks in the S&P 500 since the beginning of 2020.
(Courtesy of Susquehanna International Group. The annotations are mine.)
For clarity, 100% would be all stocks moving in the same direction for the prior 30 calendar days. What’s interesting here is not just how correlated stocks have become in a short time (jumping from 30% to over 60% in a matter of weeks). As we saw last week, we had two massive up days on Monday, October 3rd and Tuesday, October 4th when it looked like the Fed might start to pivot. On those two days, Bank of America data showed over 90 of all New York Stock Exchange stocks were up.
What can we learn from this correlation? First, don’t beat yourself up if you haven’t been able to find those sectors or assets that would have saved you this year. And second, markets show their highest correlation during times of great uncertainty (2008, 2020, now(?)).
In the next article, we’ll look at some other assets (bonds, cryptos and gold) that people consider potential safe-havens. Spoiler alert: There have been no places to hide this year. In fact, a traditional “safer” blend of 60% stocks, 40% bonds is having it’s worst performance year since 1931:
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Great Trading and God bless you,
D. R.