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What are equity correlations telling us ?

This chart monitors the average correlation of each stock of the S&P500 with the S&P500.

  •  The lower the average correlation, the more the market is driven by specific matters (Alpha). Conversely, the higher this average, the more the market is driven by a common factor (Beta).
  •  Usually a low correlation context takes place when volatility is low; the move of stocks in opposite directions reducing the volatility of the market. Volatility is currently extremely low and stocks have effectively been very reactive during the last earnings season; the market punishing bad results and rewarding good surprises.
  •  The average correlation is now more than one standard deviation below its long term average. It has been lower only during the 1990s. Of course, there is still some room to reach the historical lows, but for sure, the probability to mean reverse is increasing.
  •  As the S&P500 is at a historical high, a reversal of the average correlation would be synonymous of some market consolidation. 
Graph
MIJOT Eric , Head of Equity Strategy, Deputy Head of Strategy Research
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What are equity correlations telling us ?
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