S&P 500 intrasector correlations on the decline
Source: Bloomberg Finance, L.P., for the three-year period ending January 11, 2021. Based on rolling 30-day correlations between S&P 500 sectors. Historical average based on data from January 1991–December 2019.
- 2020’s pandemic-induced market plunge took place in record time, with all sectors and virtually all stocks in the S&P 500 declining in unison. The recovery, however, has largely been a different story – one in which certain active investment strategies have been able to thrive.
- For the first several months of the recovery, the S&P 500 was led by high-flying technology stocks while other sectors lagged. Tech stocks have since remained near the top, but market leadership has shifted violently multiple times, creating an environment ripe for stock pickers.
- The chart shows how correlations between S&P 500 sectors rose rapidly starting in Q4 2019, with correlations peaking at more than 0.90 in March 2020. As stocks have recovered, however, intra-index correlations have generally been on the decline, recently moving below their 30-year average of 0.50.1
- As correlations have declined, the door has opened wider for active managers to add alpha (or above-index returns) to a portfolio through in-depth bottom-up research. (Declining correlations may also increase the opportunity for a manager to underperform.)
- Intra-index correlations could continue to decline if rising rates dampen the performance of rate-sensitive stocks and/or increased regulation under a Democratic-controlled government drags on tech stocks. Against this backdrop, the search for quality active managers who have shown the ability to add alpha over time may be at a premium.
