The market made a new all-time high this past week. However, the manner in which it pulled back from that all-time high on Friday has caused me to slightly modify my expectations.
I have now seen about a dozen articles over the last week, mostly presented as head-scratching ramblings, discussing the breakdown of so many “correlations.” One of the recent articles noted:
“Under normal circumstances, you could wake up on any given day, take one look at the yen, and make a pretty solid prediction about how Treasurys traded overnight and/or how the Nikkei held up. And vice versa. Lately, that relationship has broken down almost entirely.”
And, in early 2017, even Morgan Stanley had taken notice:
“Regional correlations, cross-asset correlations and individual stock and FX correlations have fallen simultaneously. That’s unusual; we haven’t seen a shift this severe in over a decade . . .”
Yet, despite pointing out how the market does not make sense, some of the same authors attempt to use the paradigms that broke down in order to explain that which they say does not make sense. Yes, you heard me right. They recognize that their analysis methodology has failed to keep them on the correct side of the market, yet attempt to explain that failure using the same methods which they noted have failed them.
One attempted to “explain” why correlations have broken down through a, as he put it, “truly torturous, yet completely plausible, explanation for what we’re seeing in equities and rates.”
