Wednesday, July 11, 2007

Synchronized Markets: Nowhere To Run

The highly synchronized nature of the US equity markets has become common knowledge to most investors. The same is true for global markets. What is interesting, however, is that comparing the last 100 days of the current bull market with its first 100, US economic sectors have become somewhat less correlated with the broad market (save Utilities) while most global markets have become more so (save Japan).

Investment Strategy Implications

Highly synchronized markets make it harder to diversify away risk resulting in a default to riskier positions (the beta trade) and/or leverage to generate excess returns. This is also true within most domestic markets. Therefore, it should come as no surprise that, given the plethora of investors and the abundance of capital, competing for alpha has become largely a leveraged play and/or the beta trade (see May 1, 2007 blog posting, "The Bubble Machine of Liquidity and Leverage"). Thus far, the apparent market consequences are long periods of tranquility (low volatility, consistent gains) interrupted by moments of financial angst.

Note: To view a larger image of the tables, click on the image.

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