Goldman: "The Last Time Correlations Were This Low Was Just Before The Financial Crisis"

Tyler Durden's picture

In a note from Goldman's cross-asset strategist Ian Wright, the bank points out something troubling: on one hand, over the past six months, or rather since the US elections, equity markets around the globe have soared, and returns across regions have been "strong" - S&P 500, Stoxx 600, Nikkei 225 and MSCI EM ($) have returned roughly 11%, 16%, 20% and 11% in local currency price terms, respectively, with MSCI World ($) up 12% over the same period.  In other words, everything is up. And yet, while equity indices have rallied across regions, inter-regional equity return correlations have actually fallen materially to their lowest levels since 2000.

Why is this troubling? Because as Wright casually throws out, "the last time correlations were this low was in 2007, just preceding the financial crisis"

So does this imply that a financial crisis is imminent? Goldman isn't sure, and notes that the collapse in correlations "leads to the questions whether we expect correlations to remain low or whether we expect equity markets to recouple and move more in lock step, and what the environment will be from here. In our asset allocation, we are overweight Asian and European equities and underweight US equities over both 3- and 12-month views, with the former on growth expectations inflecting and an earlier cyclical position supporting EM and EAFE while, in the latter, the expectation that higher valuations and the later cycle of the US weigh on returns (see Exhibit 2 for return forecasts).

And just to hedge its bets, and not upset too many clients, Goldman even provides a bullish spin on the data: As Wright adds, "Exhibit 9 shows that while inter-regional equity correlations have indeed come down on average, they have remained more elevated between non-US markets such as Europe and Japan. We would not be surprised to see this trend continue in the absence of growth shocks and with anchored volatility, with the US the lagging performer from here. Data based on May 5, 2017 market close."

Which will be right outcome: collapsing volatility as a precursor to another crash, or a catalyst for even more gains? Look to this week's barrage of Fed speakers for the (rhetorical) answer.

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Jim Sampson's picture

Sooooo to the moon?

zzzz88's picture

hi guys, 

do not just look at HCG, 

look at ASPS, OCN, etc.

cover your own ass

Yen Cross's picture

   I cant believe the VIX is trading the 10 handle !!!   WTF?!


S&P 500 VIX 10.01 -0.56 -5.30%
stocker84's picture

That's because you don't read it right.

Most people don't.

And you can't Google it. 

Think of it more as ROC, than a value. 


Truth Hurts, but it shall set you free!


WTFRLY's picture

The time is coming soon, central bank madness at its limits, the war is primed and ready. The Turkey-Central Asia pipeline race is underway. Joomanji is upon us.

Sarah Whittle: [reads] "Every month at the quarter moon / There'll be a monsoon in your lagoon."

[Thunderclouds appear and open up]

Sarah Whittle: Well, a little rain never hurt anybody.

Alan Parrish: Yeah, but a lot can kill you! 

Yen Cross's picture

 BTFD--- Isn't that what they teach you in, 'Remedial Trading 101'?

ipso_facto's picture

'Truth Hurts, but it shall set you free!'

You refer to John 8:32  32Then you will know the truth, and the truth will set you free.”

Seasmoke's picture

I can't believe it hasn't been knocked down to a 9 handle yet !!!

Sonny Brakes's picture

What are they (GS) crying about, they're covered.

EmmittFitzhume's picture

Well the last time was when there was no FED eternal life perserver in place

Fake Trump's picture

It is about time.

coast1's picture

dump one trillion in paper gold in 3....2....1.

Nobody For President's picture

The correlations are not correlated?

I'm confused...

Dr. Engali's picture

None of this means crap when you have a centrally planned eCONomy. Janet has it all under control....., for now.

Deep Snorkeler's picture


Western Civilization is in the last feeding frenzy

of the techno-industrial age.

I am vulnerable and afraid.


turkey george palmer's picture

People are living on charity from the government which is living off the fiat ponzi debt system used by elites to build wealth. It will not continue forever. We can agree on that. What happens is a depression. The high and mighty who have held this up are desperately seeking some means to keep injecting fiat money via war but the game isn't working out too well as is evidenced by the Korean pivot which has the look of blackmailing China but China can't be forced to capitulate it's Russian and western trade programs or they will collapse.  The western elites really are at the end of Thier rope.