BCA Research: High Equity Correlations Are Here To Stay
We always hear it, "Today was a Risk-On day" or "Today was Risk-Off". Over the last few years, it feels like either everything is up or everything is down. If Risk is 'On' then stocks and commodities are usually up and Treasuries and the US Dollar are typically down. If the Risk trade is 'Off', then stocks and commodities are probably getting sold and money is flowing into the safety of US Treasury bonds and the Greenback.
In fact, last month Dennis Gartman and Mark Fisher teamed up with $UBS to launch two exchange traded notes designed to take advantage of such a phenomenon. $ONN (or Fisher-Gartman Risk On ETN) tries to reflect the performance of an index positioned in asset classes that are expected to rise on an optimistic outlook and decrease when the outlook is negative. $OFF (or Fisher-Gartman Risk Off ETN) reflects the daily inverse performance of that index.
Here's why:
The guys that created these ETNs aren't the only ones that believe this trend will continue. BCA Research just came out with a report telling investors to get used to these historically high correlations:
Our conclusion is that correlations among U.S. equities will likely remain elevated over the cyclical horizon, barring the unambiguous removal of one or more major economic or financial market headwinds currently clouding the outlook. …
....even if correlations do decline this year, it is difficult to see them fall outside of the range that has prevailed since the crisis began.
Nonetheless, in order for correlations to decline dramatically to pre-Lehman levels, investors will likely need some sense that the headwinds facing the U.S. economy have largely dissipated, and that the expansion has successfully transitioned to a sustainable, self-reinforcing phase (i.e. the recovery will not fall apart in the absence of continual shots of monetary or fiscal stimulus). It may be years before such a realization occurs, suggesting that the “high vol/high correlation” world is likely to persist, even if we have seen the worst for this cycle.
BCA Research goes on to list a series of possible events that could lead to correlations falling more that they are currently predicting. Keep reading over at WSJ Marketbeat.
Sources:
UBS Introduces Risk ETNs Based on Fisher-Gartman Benchmarks (ETF Trends)