U.S. Stock Correlations Fall to Levels Seen Before Past Selloffs

U.S. stocks are moving ever less in tandem, to a degree that has preceded equity market selloffs in recent years.

The S&P 500 Index’s three-month realized correlation -- a gauge of how closely the top stocks in the benchmark move relative to each other -- has fallen to just 0.16, its lowest in a year and an extreme level relative to history. A maximum possible correlation of 1.0 would signify all the shares are moving in lockstep.

Behind much of the decline is a combination of the stock rotation seen after the election of President Joe Biden -- as investors positioned for the likelihood of further stimulus -- and equity moves due to the current earnings season. But low correlations are also seen as a gauge of weakening market breadth and have occurred before recent stock market corrections, such as those in 2018.

U.S. Stock Correlations Fall to Levels Seen Before Past Selloffs

The S&P correlation index hit a record low 0.06 in December 2017, a month before the “Volmageddon” correction in U.S. equities began in January. It fell again to 0.10 that October, just before an end-of-year slump in U.S. stocks brought them to the cusp of a bear market.

Still, low correlations are welcomed by fund managers looking to beat indexes through stock picking because if most equities are moving in the same direction, it’s difficult to choose one that stands out from the crowd.

©2021 Bloomberg L.P.

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