Morning Review - 102810

8/8/2019 Morning Review - 102810

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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]

Beth Reed: 212 448 6096 or [email protected]

The good news is that industry sector correlations have dropped again in October for U.S. stocks. The chief reason to invest in a diversified portfolio of assets like

equities is because not all of them move together at the same time. For much of the year, however, correlations among the 10 major industrial sectors of the markethave been inordinately elevated, especially during market declines. That is especially damaging to investors, since there is essentially “nowhere to hide.”

Our data from October’s trading shows that correlations for the likes of tech, energy, industrials and other groups dropped for the second straight month whencompared to overall market action. Only Health Care actually increased its correlation to the S&P 500. Granted, correlations by definition only go to 100%, and manyindustry groups were in the +90% camp just 3 months ago. But a rally accompanied by lower correlations is cause for optimism, and we’ll take it.

If there is a source of concern it is that the weakness of the dollar has clearly fueled the risk asset rally of the last 2 months. That much is visible from the sharplyhigher correlations between precious metals and stocks in October. Gold, for example, is only priced in dollars so it is a good proxy for concerns over dollar weakness.Precious metals have been winning investments because investors are looking for ways to hedge potential volatility in financial assets. If they are, in the near term, tiedat the proverbial “dollar-hip,” any move higher for the greenback might spell a common pullback for both.

I will close out this brief note with one additional, if geeky, point: there appears to be a strong correlation, if not causation, between the CBOE VIX Index andthe average correlation among U.S. equity industry groups. Over the past year the correlation between “Fear” (as measured by the VIX) and how much the 10industrial sectors track the market exceeds 60%. In other words, as the benefits of diversification wane (correlations increase), the price of insurance in the optionsmarket tends to rise. That makes sense, since rising correlations make sell offs even harder to bear with every stock in a portfolio more likely to be down together.





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FIXED INCOME

Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus): Jobless Claims (8:30am EST): 455K EIA Natural Gas Report (10:30am EST)

Source: Bloomberg

Ten-year Treasury notes declined for a 6th

consecutive day, the longest losing streak in roughly 2 years, after new home sales rose more than expectedand amid speculation the Fed may be more conservative with its monetary easing strategy than previously anticipated. Benchmark yields rose 8 bps to2.72%, while 30-year yields added 6 bps to end the day at 4.05% and 2-year rates were little changed at 0.41%. Meanwhile, the government’s $35 billion5-year note auction drew a yield of 1.330% and saw coverage of 2.82 times, lower than at September’s sale but higher than the average of 2.76 timesover the past 10 offerings.









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Morning Review - 102810