May

28

PhilIt is often enlightening to see what moves the market. At various times in the business cycle the market responds differently. To look at this question a simple correlation study was performed using ETFs as surrogates for various macro variables.

Correlations with SPY for the last 95 days:

Oil USO 12%
Gold GLD -10
Bonds TLT -53
TNotes SHY -72
Euros FXE -15
Yen FXY -65
Fincls XLF 88

All of the above relationships are coincident and therefore not predictive. However it is interesting to note that gold is negatively correlated with stocks. On the other hand oil is positively correlated, which is somewhat unusual. The relationship between bonds and TNotes is negative and very strong. It seems that the recent fair weather in the stock market has been punctuated by recurring flight to quality squalls.

The dollar seems to be a significant factor as well. However it is notable that stocks are much more strongly impacted by the yen than the euro. Finally the financials are strongly and positively correlated with the market as one might expect.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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