Correlation among stock markets
It meant that assets perceived as risky, such as stocks, commodities, and nongovernment bonds, tended to either rally or sell off in lockstep.
Quantifying the Behavior of Stock Correlations Under Market Stress | Scientific Reports
Assets perceived as safe tended to do the same, but in the opposite direction. Within equities, this meant very high correlations between individual stocks and sectors—a phenomenon that made it extremely difficult for active investors to beat the market and helped accelerate a trend toward passive, or index, investing that remains under way. But the correlation—a measure of the degree to which two securities move in relation to each other—between individual stocks has quietly fallen as stock indexes notch all-time highs.
In fact, as noted in the chart at the top of the page, intra-stock correlations are now significantly below the post-financial crisis average and have also dipped below the pre-financial crisis average, said Brian Belski, chief investment strategist at BMO Capital Markets, in a Friday note.
So, while stock pickers—or at least the ones who pick the right stocks—may eventually rejoice, the shift carries some other ramifications. William Watts is MarketWatch's deputy markets editor, based in New York. Follow him on Twitter wlwatts.
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Until New York Markets Open Market Snapshot Analyst Ratings. This little-noticed phenomenon could make stock picking great again. By William Watts Deputy markets editor.
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