You don’t need one right now…
“The difference between investing in Emerging Markets equities, Developed Markets equities, and High Yield bonds is now effectively zero.”
That’s from a short note out today by ConvergEx, which shows that correlations among US stocks have hit their highest point since the financial crisis.
And the other asset classes listed above are moving right alongside them to a remarkable degree (correlations are of sectors against the S&P 500):
Call it the return of event-driven correlations, and no surprise that in addition to the tumult of recent days, the longer trend has coincided with the spike in volatility and elevated Vix levels since early August.
A few conclusions other than “Buy Gold!” from Convergex::
The correlations we note among industry sectors are profoundly and dysfunctionally high. They come, in my opinion, from the underlying concern over asecond financial crisis caused by the default of Greek or other European sovereign debt and the resulting stress caused to the financial system. The only reason itwon’t matter whether you own utility stocks or tech stocks or health care stocks is if the world’s major banks can’t open for business the next day.
Stock markets around the world, but especially in the U.S. and Europe, are trying to fine tune this existential calculus. If there is a 5% chance of a Greek default, then where should stocks trade? OK… Now how about 10%? Now 20%? Now back to 5%? Now what if U.S. banks need another bailout because their counterparty exposure is higher than we think? You get the idea.
Markets are trying to discount the survival rate of another cross-border financial pandemic. That is why they move in lock step.
Gold and silver traders have gotten too used to the negative correlation trade with stocks. This is, in fact, an unusual relationship for precious metals tostocks. The correlation should actually be zero. You can begin to hear the frustration in traders’ voices on days like Monday, when gold doesn’t rally on a drop inthe market. Here’s a news flash: it is not supposed to move opposite to stocks. It is only supposed to move independently of them.
The stability of high quality bonds (we use the iShares iBoxx Investment Grade Corp ETF, symbol LQD, to track this asset class) in a tumultuous periodhas been unexpected and frankly impressive. Investment grade bonds are still up over 4% on the year, and their correlation to stocks is negative 24%. Not as inversely related as the precious metals stats I noted above, but far better than the 89% correlation to stocks exhibited by High Yield Bonds.
We find the performance of IG bonds “impressive” as well, but probably for different reasons. Corporate balance sheets are in great shape all across the ratings spectrum, including in high yield — a few years of extending maturities while rates are pressed to the floor will do that. We’re pretty sure that IG bonds are negatively correlated to stocks not because companies are so great, but simply because they’re tracking the performance of US government bonds while investors freak out.
Anyways, an interesting spot from ConvergEx — short note posted in the usual place.
Related links:
Core blimey – FT Alphaville
Earnings vs event-driven correlations – FT Alphaville