We’ve been writing about asset price correlations every month since October 2009 for basically one reason: they are simultaneously one of the most watched and least understood data points in capital markets. It seems like not a day goes by without seeing some commentary about how strange it is that gold or long-dated Treasuries or even the VIX is trading in the same direction as the S&P 500. While all these asset classes have long-run negative correlations to US stocks, over the short term that relationship can certainly flip more positive.
Readers of a certain vintage will remember that gold, for example, was not a great hedge when US stocks swooned in 2008. It began the year at $857/ounce, dropped to as low as $705/oz in November, and only got back to basically unchanged ($869/oz) in the last days of the year. Better than the S&P’s -37% return, to be sure, but hardly an upside hedge against financial system mayhem.
More recently (2019 to the present), gold’s short-run correlation to stocks has been all over the map, as the following chart of 30-day trailing correlations of daily returns for the S&P 500 and IAU (iShares Gold ETF) clearly shows.
Two points of interest here:
- Note the large move from February 2020 (-0.69 correlation) to May 2020 (+0.50).
This happened as gold went from being a hedge against global economic uncertainty to just another financial asset to be sold in a crisis. Recall that the price here fell by 11% from March 9th to March 18th, right alongside the S&P’s 18% decline from March 9th to the 23rd.
- Gold’s 30-day correlation to equities is currently near its high back to the start of 2019, at 0.49.
This is not to say that the relationship is going to work every day (it barely did so today), but by and large gold and stocks are moving in the same direction just now. The easy explanation is that both are discounting further US fiscal stimulus, so their prices ebb and flow as news on that topic develops.
We also want to touch on recent correlation trends between long dated Treasuries and the CBOE VIX Index.
First up, a chart of the price return correlation between the S&P 500 and TLT (iShares +20 Treasuries) back to 2019:
Two points here:
- Even though the historical correlation here averages -0.46, it can actually peak its head over zero for short periods of time. Since 2019 that has happened twice: once in mid 2019 when it became clear the Fed would be cutting interest rates dramatically (a plus for both stocks and bonds) and again in September 2020 when Tech was leading equities higher but confidence in a US economic recovery was low.
- At present, the correlation between long-dated Treasuries and US stocks has been solidly negative (-0.26) and we expect it will remain so given growing confidence in economic recovery.
Finally, here are the 30-day correlations between changes in the CBOE VIX Index and daily returns for the S&P 500 from 2019 to the present:
Two points here:
- Over any 30-day window in this timeframe VIX price changes correlate negatively to the direction of the S&P 500. The least-negative correlation was for the period ending May 1st (-0.40), when the S&P had rallied 31% off its March lows but the VIX still had to incorporate significant price volatility.
- The most recent 30-day correlation is -0.63, which basically says the VIX is generally doing what it always does: going up when stocks go down and vice versa.
The key takeaway for these 3 examples is that asset class price correlations are sticky over the long run but can – for good, fundamental reasons – move outside their averages for shorter periods of time. Gold will not hedge a financial system liquidity crisis in the short run. Long dated Treasuries won’t trade with equities when it is stay-at-home Tech stocks driving S&P returns. The VIX is a purer hedge than either, but even then an imperfect one coming off heightened periods of extreme volatility.