NEW YORK- US stocks’ tendency to move in sync has plunged to near-record lows, but what might seem like a stock picker’s dream may actually be a mirage, and investors may be in for a rude awakening.
S&P 500 correlation – a gauge of herd behavior, which measures how closely daily returns of index constituents align over a month – slipped to 0.22 at the end of June, close to the lowest since November 2021, according to data from S&P Dow Jones Indices. That means that many stocks are moving in different directions.
Investors expect stocks to move increasingly out of sync as shown by the Cboe 3-Month Implied Correlation Index which measures the 3-month expected average correlation across the top 50 value-weighted S&P 500 stocks. The Index touched a record low of 17.59 on Wednesday.
That would typically lower risk and offer more opportunities for stock pickers. But with the bulk of the market’s gains being driven by a handful of mega cap names and a crowd of market bets on continued low correlation, investors may be relying on a false sense of calm.
History suggests such narrow breadth can set the market up for a sudden surge of volatility.
