No Place to Hide When the Stock Market Falls?

One thing usually happens in times of crisis. You can use this to identify a bad market from a period of serious system wide financial stress. In a crisis, investors sell off all risky assets and seek only safe havens. In investment geek terms, all correlations go to one. We’re seeing that now. The final step in this process was the steep decline in gold and silver on Friday. Before that, gold and other precious metals were acting as safe havens along with the dollar and treasury bonds. Now, only the dollar and treasury bills are left standing.

Barron’s has a good explication of this in today’s edition. (Subscription might be required.) It reports on ETF data from ConvergEx Group. The group found that correlations among usually diversified assets are rising and area close to one.

Tapping into the group’s database, Barron’s surveyed monthly correlation rates — which measure how closely funds move in tandem — between 19 different ETFs covering broad equities and fixed-income markets. The results were jarring: other than gold, via the SPDR Gold Trust (ticker: GLD), silver, through the iShares Silver Trust (SLV) and investment-grade corporate bonds via the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), everything else was moving in sync through Thursday.

As a group, the 10 major sectors of the Standard & Poor’s 500 are averaging correlations of nearly 96%, versus roughly 82% three months ago, and in the same neighborhood as the iShares MSCI EAFE Index Fund (EFA). Meanwhile, junk bonds in the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) are performing like blue-chip stocks 80% of the time.

Note that the data were as of Thursday, before gold joined the decline.