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Stock Groups Moving With S&P 500 Boost Index's Vulnerability to Jobs Data
Industry groups in the U.S. stock market are moving in lockstep with the Standard & Poor’s 500 Index at an almost record pace, showing that economic reports are having a bigger effect on the market than ever.
Exchange-traded funds that mimic the 10 main S&P 500 groups are moving with the U.S. equity gauge at almost the highest rate since 1998, when Bloomberg started compiling the data. The correlation coefficient that measures how closely assets rise and fall together exceeds 90 percent for seven of the industries relative to the index, BNY ConvergEx Group LLC data show.
Rising correlations show investors are ignoring relative values among industries and reacting to day-to-day signals on the economy, according to Mohamed El-Erian, the chief executive officer of Pacific Investment Management Co. The S&P 500 had the biggest rally in almost two months yesterday on better-than- estimated growth in U.S. and Chinese manufacturing.
“Sharp markets moves are primarily driven by macro sentiment and indicators,” El-Erian of Newport Beach, California-based Pimco, which runs the world’s biggest bond fund, wrote in an e-mail. “As such, data releases can, and do have outsized impacts on market valuations in both directions.”
Scale Back
Hiring probably cooled in August as companies scaled back amid signs of a slowdown, economists surveyed by Bloomberg News said. Private payrolls that exclude government agencies rose by 40,000 after a 71,000 July gain, while the unemployment rate climbed to 9.6 percent, the survey shows. Joblessness held at 9.5 percent in July and has fallen less than a percentage point from a 26-year high last year.
The S&P 500 plunged 14 percent between April 23, when the index reached a 19-month high, and the end of August as widening budget deficits in Europe raised concern the global economy is in jeopardy. The benchmark for U.S. equities slumped to a seven- week low on Aug. 24 after a report showed a record plunge in existing home sales. Weaker-than-estimated sales of new homes and durable-goods orders also weighed on the market.
ETFs of economically sensitive industries are among those with the highest correlation with the S&P 500, BNY ConvergEx data show. The Technology Select Sector SPDR Fund, the Industrial Select Sector SPDR Fund and the Energy Select Sector SPDR Fund’s correlation with the U.S. equity benchmark is at least 93 percent, near the highest from the past 12 years, according to data compiled by Bloomberg and BNY ConvergEx. Financial stocks have the highest correlation, with a reading of 98 percent.
‘In Sync’
Gauges of technology makers, industrial companies and energy producers have dropped 13 percent since April 23, when the S&P 500 closed at 1,217.28, its high for the year. In the same period, the equity benchmark declined 11 percent.
“This is not a healthy market,” Nicholas Colas, chief market strategist at BNY ConvergEx in New York, wrote in a report yesterday. “When everything moves in sync, asset allocators have to pull in their horns. Chances of a significant, lasting market rally appear rather slim.”
Concern about the recovery also sent the correlation between the S&P 500 and its individual members to 0.81 in the 50 trading days through July 7, almost twice its 30-year average, Birinyi Associates Inc. data show. The last time the relationship was this strong was on Oct. 19, 1987, when it rose to 0.83 during the stock market crash known as “Black Monday,” according to the Westport, Connecticut-based research firm.
Macro Dominates
“The macro environment is dominating the trading action more so than individual company news,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $63 billion. “That’s a pattern that is likely to change as we get closer to the end of the third quarter and companies start to pre-announce earnings.”
Economists predict a 3 percent expansion in U.S. gross domestic product this year, the biggest since 2005, according to estimates compiled by Bloomberg. Earnings for S&P 500 companies may rise 36 percent in 2010 and 16 percent in 2011, the largest two-year advance since the period ended in 1995. The index is trading at 14.34 times forecast 2010 earnings, compared with an average multiple of about 16.4 since 1954 using reported profit, the data show.
The correlations for "defensive" industries are the lowest relative to the S&P 500, BNY ConvergEx data show. Health-care and utilities ETFs are at least 81 percent correlated with the U.S. equity benchmark. Gauges of both groups have outperformed the S&P 500 last month.
“It’s a general trend through this risk-on, risk-off area of the market that the correlations have all come closer together,” said Chad Morganlander, a Florham Park, New Jersey- based money manager at Stifel Nicolaus & Co., which oversees $90 billion. “It’s my belief that until stabilization within the global economic framework occurs, the correlated trade will continue to be persistent.”
To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net
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