Correlations Have Spiked In The US, Less So Around The World

Correlations Have Spiked In The US, Less So Around The World by Eric Bush, CFA, Gavekal Capital Blog

The correlation between US stocks and the MSCI World Index has once again spiked as volatility has increased. In the chart below, we show 20-day, 65-day, and 200-day rolling correlation between US stocks and the MSCI World Index. The 20-day correlation has increased to 0.82 which is the highest level since 9/7/2011 and it surpasses any level hit during the financial crisis. The 65-day correlation has increased to 0.66 and the 200-day correlation has increased to 0.57. The 65-day correlation peaked at 0.70 in 2008 and at 0.78 in 2011. The 200-day correlation peaked at 0.66 in 2009 and at 0.72 in 2011.

Unlike in 2011, however, Europe has provided somewhat of a reprieve for investors. In 2011, the 200-day correlation with the MSCI World Index peaked at 0.73. Today, it sits at just 0.46. Looking at Europe as a whole, or on an individual country basis, there seems to have been a structural shift after 2012. Correlations steadily marched higher from 2002 to early 2012. Since then, however, correlation to the global equity market has significantly decreased (even with the slight increase in 2015). In the charts below, we show the 200-day moving average for Europe as well as for several significant country indices.

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Lastly, as usual, Asian equities have marched to a slightly different beat. While correlations have certainly increased during the last month, they remain well below levels seen in the US. The 20-day correlation and 65-day correlation did, however, spike to level last seen in 2011.



For US only stock pickers it has been difficult once again to find stocks that have bucked the declining trend. However, this most recent sell off once again shows how important global diversification is. Investors with a large tilt towards Europe and especially towards Asia have had a much lower correlation to the overall global equity market.