The correlation index for the stock market recently ascended to its highest point in nearly four months on Wednesday, indicating a growing anticipation among investors for heightened market fluctuations in the near future.
As the S&P 500 experienced a decline of 0.58% on Wednesday, falling almost 5% from its late March peak, the Cboe 1-Month Implied Correlation Index escalated to 21.79, marking its zenith since the end of December.
This surge in the Cboe index, which gauges the expected correlation among the constituents of the S&P 500, signifies a shift from its position below 10 at the beginning of April—a level seldom seen in its almost twenty-year history, as per LSEG data.
According to JJ Kinahan, CEO of IG North America and president of Tastytrade, this increase in correlation expectations suggests that investors are bracing for an uptick in market volatility in the coming period. Kinahan highlighted that despite the recent rise, correlation levels are relatively low historically, and the current increase may be attributed to investors adjusting their portfolios in light of the heightened volatility.
He reassured, however, that the situation does not warrant immediate concern, although it merits attention. The index's current level is significantly below its five-year median of approximately 35.
Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, remarked on the historically low correlation levels over the past two years, even lower than those observed in 2017. Xu noted, "For a significant increase in volatility, correlations need to begin rising," emphasizing that low correlation and the independent movement of individual stocks typically dampen volatility at the index level.
