Goldman: “This Is the Largest And Fastest Correlation Change On Record Outside Of 1987”
by Tyler Durden
ZeroHedge.com
Fri, 04/13/2018
Back on January 20, the day of Trump’s inauguration, Morgan Stanley pointed out a striking change to the cross-asset regime, noting that “We Haven’t Seen A Shift This Severe In Over A Decade”, after cross-asset correlations had plunged the most on record.
As we noted at the time, there were positive and negative consequences from this shift: from an economic perspective, the dramatic move was troubling because such a decline is common in ‘late cycle’ environments, as ‘idiosyncratic’ stories (company-specific M&A, tweets) become larger drivers than economic or earnings fears. The decline is directly linked to the lower realized volatility seen in credit and equity markets; when underlying components are moving in different directions, it is harder to get large shifts overall. In retrospect, the move also unleashed the record low-vol environment that characterized most of 2017… if not 2018.
At the same time, lower correlations meant a better ‘macro’ trading environment (since each market isn’t the ‘same’ trade), and has traditionally been said to usher in a “stock-picker’s market” (as opposed to a central bank-frontrunning market), although what it mostly ushered in was complaints by banks and hedge funds that “vol was too low.” That said, it is a mixed blessing for diversification, as it lowers overall portfolio volatility, but also makes hedging through ‘proxies’ harder.
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Whatever the consequences of record low correlation may have been, however, they are now over because in a note released overnight, Goldman’s chief equity strategist David Kostin, shows that in a furious reversal of the January 2017 move, over the past 3 months, stock correlations within the S&P 500 have surged to the 95th percentile since 1980.
Specifically, average 3-month S&P 500 stock correlations have increased from just 9% in January to 52% today, a move which Goldman calculates was “the fastest and largest increase outside of 1987.”
The Rest…HERE
