Correlations of daily price changes with S&P 500
Elevated correlations across asset classes have been a persistent feature of the post-recession era, with markets often moving uniformly together. Correlations declined earlier in 2013, however, and have remained at these lower levels in recent months, according to Michael Hood, Global Markets Strategist at J.P. Morgan. The chart shows daily price correlations of various asset classes with the S&P 500 across three periods: 1) the pre-crisis years of 2006 and 2007; 2) the second half of 2011, when correlations peaked; 3) the most recent period, from May 2013 to October 2013. According to the chart, while correlations remain somewhat above their pre-crisis norm, they have fallen significantly from their 2011 peak. Correlations remain somewhat high in equities and high yield, given that these markets are trading off of a common factor—an increasingly synchronized business cycle upturn in the developed world. In more purely risk-oriented asset classes, such as currencies and commodities, correlations have normalized. Lower correlations across asset classes, and an end to the “risk on, risk off” pattern, mean that investors can construct reasonably diversified portfolios within public markets, says Hood.