Earnings Have Stocks Dancing to the Beat of Their Own Drummers

(Bloomberg) -- There’s an old market adage that in a crisis correlations go to one, meaning everything falls in unison.

However, thanks to a common pattern associated with earnings season, U.S. equities are doing anything but that.

The one-month realized correlation of stocks in the S&P 500 Index has nearly halved since JPMorgan Chase & Co. unofficially kicked off the start of the reporting period on April 13. This metric -- a gauge of how much components of the benchmark move in tandem -- has dipped to just below its five-year average and hit its lowest level since Feb. 5, when an explosion of volatility roiled markets.

Earnings Have Stocks Dancing to the Beat of Their Own Drummers

Earnings season is typically an impetus for stocks to swing on company-specific concerns. There’s an intuitive logic to this: It’s one of four times each year when every management team is providing detailed performance results and guidance about their businesses. That typically helps individual equities dance to the beat of their own drummers -- at least for a little while.

Strategists were pointing to these quarterly reports as a catalyst for depressed volatility in indexes, even as realized stock swings were running high heading into the season. The argument has been borne out by the Cboe Volatility Index’s decline from 18.5 before JPMorgan’s release to below 15 on Wednesday morning.

“Implied correlation falls before companies start releasing results because people know this will happen and as earnings season ends, it can pick up a little bit,” said Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors.

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