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Tuesday
Aug142012

Asset Class Correlations in 2012

Below we have updated our asset class correlation matrices for 2012 and over the last ten years.  The correlations are based on daily percentage moves.  A correlation of 1 means the two asset classes move exactly inline with each other, while a correlation of -1 means they move in the exact opposite direction.  A correlation of zero means there is no correlation between the two.  We also created a matrix that subtracts the correlations over the past ten years from the correlations in 2012 so you can see whether relationships between the various asset classes have gotten stronger or weaker in 2012.

So far in 2012, the Industrials sector has been the most closely correlated with the S&P 500 as a whole, while the two sectors that have been most closely correlated with each other are Materials and Industrials.  Utilities has been the least correlated sector with the S&P 500 in 2012, and the two sectors that have been the least correlated with each other so far this year have been Utilities and Technology.

Unsurprisingly, Energy is the sector that has been the most closely correlated with oil in 2012, while Telecom has the lowest correlation with oil.  Materials has been the most closely correlated sector with gold.  Both gold and oil have been inversely correlated with the dollar.  The two most inversely correlated asset classes in 2012 have been the S&P 500 and the long bond at -0.62.  So when interest rates are down, the market is usually down as well, and vice versa.

If we compare the correlations so far in 2012 to the correlations over the past ten years, we see that the inverse correlations between the long bond and stocks as well as the dollar and stocks have gotten more extreme.  Both Telecom and Utilities have seen their correlations with the S&P 500 and the other eight sectors drop quite a bit as well.  So if you're overweight these two sectors, you've really outperformed on down market days, and you've underperformed on market up days.  The two sectors that have seen their correlations increase the most with each other in 2012 have been Financials and Energy.  Finally, both gold and oil have seen their correlations with the S&P 500 and all ten sectors increase significantly this year.  In this regards, the gold protection trade hasn't been working as well as gold bugs would like.

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