From Bloomberg:
June 29 (Bloomberg) — Investors are moving in lockstep like never before, driving up stocks, commodities and emerging markets and risking a replay of last year, when they all plunged the most since World War II.
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 . . .
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.
The S&P is also increasingly (werrdly) moving in tandem with the price of crude oil, with the correlation value above 0.7 in June. The correlation between the S&P and the MSCI Emerging markets index is also apparently the tightest since Russia defaulted on its debt in 1998. While we’re told the correlation between the S&P 500 and the HFRI index of hedge funds reached 0.5 per cent in April for the first time in almost five years.
The rather dramatic increase in correlation should be a bit of a worry for investors, since it makes diversification rather difficult.
The Bloomberg story suggests shifting money to cash and bonds to hedge against the risk of a fall across the various asset-classes. (That’s corporate bonds, not Treasuries, which as we suggested on Monday, are starting to turn positively correlated with the S&P 500 too).
The suggestion to shift into cash is an interesting one, given that one of the primary explanations for the lock-step moves in various asset classes (other than they’ve all fallen together, and are now recovering together) is the possibility that this is either a response to the possibility of inflation caused by central banks’ various liquidity ops or a direct result of them.
In which case, perhaps, cash and fixed-return bonds are the last thing you’d want to be invested in.
Another inflation vs deflation debate then.
Related links:
Treasuries turn tail-devourer - FT Alphaville
Of bonds and stocks and the Weimar Republic - FT Alphaville
JPM says mild inflation good for stocks too - FT Alphaville
Energy is currency - FT Alphaville
