Source: S&P Dow Jones Indices Correlation & Dispersion Index Dashboard, June 2nd 2014
One of the features of volatility (measured at the level of whole markets) is that it’s very dependent on correlation, although the relationship is subtle. If stocks move independently, their aggregate impact on the market is diminished. If stocks move together, the market whips around with their combined movement.
As we’ve noted before, it is entirely possible that correlations will spike up in response to a macroeconomic crisis event. In the meantime, however, the prevalently low correlations are providing diversified investors with an unusually smooth ride.
This article was written by Tim Edwards, direct index investment strategy, S&P Dow Jones Indices.
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