The equities market and stock exchange traded funds have been moving in lock-step for the better part of the last few years as the heightened market volatility forced investors to trade on the macroeconomic outlook. However, correlation among various asset classes is starting to diminish.
Correlation between asset classes, like the U.S. dollar and stocks, have dropped from their peaks late last year, reports Tom Lauricella for The Wall Street Journal.
Consequently, large-cap stock pickers are doing much better at beating their benchmarks. Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill, contributes their success to the lower correlation between stocks. [Risk-On, Risk-Off Trades Drive S&P 500 ETFs]
According to BofA Merrill Lynch data, correlation has dipped below the 26-year average, the first time in a little under six years or before the financial crisis. [Sector ETF Correlations Highest Since Financial Crisis]
Rising correlation between asset classes is one of the key concepts behind portfolio diversification. When fear hits the markets and investors begin to exit the markets in tandem, correlation between assets manifest. Last year, this occurred on fears of a double-dip recession and a widespread Eurozone financial crisis. [Are Rising Correlations Affecting ETF Diversification?]
Consequently, the markets witnessed a record number of “all-or-nothing” days where the S&P 500 may surge or plunge 400 points in a single trading day. [Sector ETFs Continue to Move as a Pack]
While the markets has somewhat stabilized, we shouldn’t grow complacent. After the weak showing in Spain, Europe is once again threatening market stability. Additionally, in the U.S., political uncertainty has the markets on edge. [Spain ETF Falls to Lowest Since March 2009 on Debt Woes]
For more information on U.S. stocks, visit our S&P 500 category.
Max Chen contributed to this article.