Markets moving as a herd has confounded attempts to diversify portfolios by spreading money around in various sectors.
Asset prices “are currently moving in concert to a degree I have not seen in the two years we’ve been looking at the issue of price correlations,” Colas said.
“That’s simply not the way the classic market ‘playbook’ says stocks should trade. Early cycle stocks (financials, consumer durables) should not go up and down in tandem with defensive sectors (pharma, consumer staples), for example. And yet they very much do at the moment,” the strategist wrote.
Meanwhile, the high correlation between high-yield bonds and U.S. stocks shows junk bonds are “essentially acting entirely like stock and nothing like bonds.”
Colas blamed the high correlations on worries over the Eurozone sovereign crisis and the U.S. federal debt limit debate.
