The historically high correlation between equity prices and oil prices that existed early this year has moderated somewhat. The 200-day correlation between Brent Crude Oil and the MSCI World Index remains elevated at 46%. However, we would expect to see this drop over the coming months as the 65-day correlation has fallen quite a bit from a high of 57% on 4/19/16 to 38% as of yesterday. As the chart below shows this is still a very elevated level relative to the last 35+ years of history. We will be keeping a close eye on whether the 65-day correlation drops back into the long-term historical range. If it doesn’t then this could be a sign that a regime change has taken place for this relationship.
The correlation between US equity prices and global equity prices has also fallen significantly over the past several months. In fact, the 65-day correlation, currently at 41%, is the lowest level in nearly two years. Correlation among this pair tends to spike to around 70% during times of market turmoil as evident in 2008, 2010 and 2011.
Stocks and bonds continue to have a fairly high positive correlation. The 65-day correlation between the S&P 500 and the 10-year treasury is currently at 43%. This is well below extreme levels reached in 2002 and 2011, however, it is also well above the levels seen during most of the 2002-2007 period.
Lastly, the negative correlation between WTI and the VIX has moderated quite a bit since April. On 4/14/2016, the correlation between WTI and the VIX was -49%, the most negatively correlated it had been at any time in roughly three years. It currently is at -24%. It is worth pointing out how the relationship between oil prices and the VIX seems to have changed in the post-GFC world. Prior 2009, this relationship had a relatively stable positive relationship. Since then the relationship has moved to a negative correlation the majority of the time.
