From the desk of Tyler Durden over at Zero Hedge:
…look at the correlations between the 10 industry sectors of the S&P 500. At 97.2% average correlation, U.S. stocks are moving in lock step to a degree we haven’t seen since the depth of the Financial Crisis. This is not the normal course of business, to say the least. More commonly, some stocks go up while others decline.
Granted, this is abnormally high, and suggests that the markets aren’t functioning the way they should. But the 10 industry sectors of the S&P500 are composed of stocks, and stocks are part of just one asset class. So even with an abnormally high correlation, stocks are still stocks and will tend to move together…just not to this degree.
This is the reason that diversification and tactical asset allocation require investing in asset classes outside of stocks and bonds. Case in point, the article goes on to highlight the only asset class that isn’t following stocks: precious metals (specifically gold and silver).
These precious metals still show negative correlations to stocks (negative 55% for gold and negative 35% for silver).
Stock Correlations Soar To 97.2%: Here’s Why
Tyler Durden | Zero Hedge