Bespoke also attributes the greater correlation among stocks to the rising popularity of ETFs. About 42% of total composite volume was found in ETFs on August 24, the worst one-day decline in four years, reports Chris Dieterich for Barron’s.
“The uptick in frequency of all or nothing days has coincided pretty closely with the increased popularity of ETFs, as buying or selling in securities like the SPDR S&P 500 (SPY) causes buying or selling pressure in each of the securities compromising the S&P 500,” Bespoke said. “While ETFs have been beneficial for investors looking for a low cost way of gaining exposure to the broad market, one of the unintended consequences has been that the daily correlation of individual stocks has increased.”
This also corresponds with previous research that has shown that correlation between individual securities in sectors and markets is also on the rise as usage of ETFs increase. [Increased Index ETF Usage Promotes Stock Correlation Across the Board]
Looking ahead, Bespoke pointed out that markets typically recover after all-or-nothing events, even if it does take a month or more. After the November 26, 2008 occurrence, the markets turned out a positive return of 2.6% in six months and a 25.1% gain in one year. After the October 6, 2011 occurrence, the markets returned 7.6% over the following month, 9.7% in three months, 20.0% in six months and 25.4% over one year.
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Max Chen contributed to this article.