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Stocks Move in Lockstep as Fed’s Rate Increases Show No Mercy – with insight from the Wall Street Journal
The S&P 500’s one-month realized correlation has climbed to highest level since March 2020
By Hardika Singh
Shares of everything from technology giants to household-goods companies and utility providers have been trading in lockstep over the past month, a potentially worrying sign to investors trying to navigate a turbulent market.
The S&P 500’s one-month realized correlation—a measure of how stocks in the benchmark index have moved in relation to one another over the past 30 days—climbed to 65.3% on Sept. 13, according to Susquehanna International Group.
It has since hovered around 60%, levels last seen in March 2020 when stocks across sectors fell in unison at the onset of the Covid-19 pandemic. A correlation of 100% means stocks are all moving together, while a correlation of zero means their moves aren’t related at all.
The Federal Reserve’s bid to raise interest rates to tame red-hot inflation has shown no mercy in the stock market. The S&P 500 is down 25% in 2022 and off 17% from its summer peak on Aug. 16. All 11 sectors of the index are down over the past month. For the year, only the energy group is in the green.
Stocks have been trading together because investors are largely focused on macroeconomic news—and conflicting economic data have led them to flip-flop their bets on whether the Fed will maintain its pace of rate increases.
“Markets are being chased all together, which is rare,” said Chris Murphy, co-head of derivatives strategy at Susquehanna.
Businesses and consumers continue to grapple with rising costs, the U.S. dollar has soared to a 20-year high and oil prices surged above $100 a barrel after Russia invaded Ukraine. Those factors have sparked declines in everything from stocks to bonds and gold this year.
Next up, investors are looking ahead to Thursday’s consumer-price report for any signs the cost pressures are easing, data that will influence the Fed’s path forward on rates.
At the start of last week, some investors shifted their bets that the Fed was nearing a pivot after the release of cooler manufacturing and job-openings data. Markets notched their best two-day stretch since 2020. About 90% of the stocks trading on the New York Stock Exchange recorded two consecutive days of gains for the first time since early 2013, according to analysts at Bank of America Corp.
“When you basically shift up your interest rates, that’s just going to impact everything,” said Brando Reyna, portfolio manager for Novare Capital, an investment adviser based in Charlotte, N.C., that manages $1.3 billion in assets.
The rally was short-lived. The S&P 500 has fallen in each of the following five sessions. Plus, Friday’s jobs report showed the labor market remains robust and the unemployment rate has fallen back to a half-century low, shattering hopes that the Fed would pause raising interest rates.
The prospect of higher rates has led to few outright winners in the market. A Bespoke Investment Group analysis of the Russell 3000 found that a basket of stocks with low valuations, high-dividend yields and large market caps fell about 15% on average from their summer highs in mid-August to the end of September. In comparison, the average stock in the index dropped almost 19% through the same period.
“You’re not trying to hit home runs in this environment. Singles are good,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree, of the difficulty of trying to beat the broader market. Mr. Flanagan said he is seeking safety in Treasury floating-rate notes this year.
One factor that has pushed correlations higher: the popularity of exchange-traded funds. Investors in index-tracking funds who want to increase or decrease their exposure to stocks during periods of turmoil can buy or sell only broadly—not pick and choose shares.
The tandem moves extend well beyond stocks. Government bonds, which are considered a haven during times of financial turmoil, have slipped alongside stocks for three consecutive quarters for the first time since 1974, according to Strategas Research.
The Bloomberg U.S. Aggregate bond index—which tracks a basket of government and investment-grade corporate bonds—is down about 15% this year. Gold, another haven, has fallen 8.1%.
“There’s no way out. We just have to sit through the pain,” said Seema Shah, chief global strategist at Principal Global Investors, of the simultaneous declines in stocks and bonds.
Some investors say they will be watching to see whether the kickoff of the third-quarter earnings season later this week will help break the stretch of lockstep moves. They will be trying to identify which companies have been able to navigate the challenging environment and successfully pass on higher costs to their customers.
Already, the S&P 500’s one-month implied correlation, a measure of how the market expects stocks to move in relation to one another over the next 30 days, has started to drop, according to Susquehanna.
Brian Mulberry, client portfolio manager at Zacks Investment Management, said he is advising investors to be picky when deciding which stocks to buy, suggesting they seek high-quality companies that are boosting earnings and paying dividends.
“You’ll have these good companies priced lower than where they should be, and that creates an opportunity for investors,” Mr. Mulberry said.
