S&P 500 Stocks Getting More Volatile But Less Correlated

Recent market action surrounding the Biden election and news of prospective vaccines has produced unusual activity. Volatility has risen but the correlation between stocks has fallen to unusually low levels. The recent strength in value and small-cap stocks may have contributed to this behaviour. However, the precise reason for this effect remains uncertain as does the possible length of this divergence.

The implication of a longer-term decrease in the correlation between stocks, should it occur, will be to mitigate the role of index-based investment strategies in favour of active management to produce superior returns. Such an environment will produce significant risks and opportunities in stocks.

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