Falling Correlations in the Stock Market
In 2008-09, the sell-off in stocks was deep. Nearly every company in every industry was hit hard – regardless of credit quality or fundamentals. Coming out of 2009, stocks continued to trade very much in lockstep with one another. Companies with very different fundamental values were trading up or down by very similar amounts. In other words – the market was not rewarding strong companies more than weaker ones.
Over the past 5 years, that trend has steadily been reversing. The CBOE Implied Correlation Index measures the average correlation of stocks that comprise the S&P 500 against the S&P 500 Index itself. The Implied Correlation Index has been on a year-over-year decline since 2008-09. The trend has continued this year, as correlations have trended downward from year-end 2012 highs above 70 to current levels in the low 50’s (see chart below).
|S&P 500 Implied Correlation Index Historical Data (CBOE.com)|
Stocks are no longer moving together quite as tightly as they have over the last 5 years.