MSCI Correlation With Oil – Getting Tighter – Is It Time To Pile Into Cyclicals?
About a month ago, we highlighted that the correlation between stocks and oil was as positively correlated as it has ever been since 1980. The correlation between stocks and oil hasn’t slipped yet and in fact, it just keeps getting tighter. Last week, the 65-day correlation between Brent crude and the MSCI World Index reached 0.54 which surpassed the previous 35-year high made in November. The only time that stocks and oil have traded more in tandem was in 1991. But during this period, stocks and oil were negatively correlated to the tune of a -0.63 correlation.
MSCI Correlation With Oil
Other commodities are beginning to behave in a more correlated fashion with stocks as well. The 200-day correlation between the price of copper and the MSCI World Index has increased to 0.36, the most positive correlation since January 2014. The 65-day correlation between the GSCI Total Return Index and the MSCI World Index has increased to 0.58, which is the most positive correlation since May 2013. This is a major departure from the relationship that existed from the 3Q13-2Q15. However, we are now back in the correlation range that characterized most of the 2009-2Q13 period.
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
Even if this tighter relationship between commodities and stocks is here to stay, it’s not necessarily a signal that investors should pile into cyclical stocks. Yes, cyclicals outperformed growth counter-cyclicals from 2009-2010. However, most of that outperformance occurred from February 2009-June 2009. And by 2013, growth counter-cyclicals were making new relative highs against cyclicals. Even with the outperformance of cyclical stocks over the past month, growth counter-cyclicals have continued to outperform cyclicals during this most recent phase of unusually higher correlations between commodities and stocks.