sectors and styles in the s&p 500 index have started to move independently after seven years of depressed volatility and tighter correlations. the catalyst is the u.s. presidential election, which republican donald trump unexpectedly won, causing stocks to rally. among the sharpest collapses is the link between financial stocks in the s&p 500 and the broader gauge. the correlation between the two over the last month has fallen to 0.59, compared with 0.89, where it was on nov. 7, the day before the election, according to factset data. a correlation of 1 would indicate the two are moving in perfect sync. shares of banks, asset managers and insurance companies as a group have jumped 11% since election day as investors bet on lighter regulation for the sector under the trump administration. the financial sector<u+2019>s performance trounced other groups, such as utilities and consumer staples, each of which are down more than 3%. while the s&p 500 climbed to a record for a second day on tuesday , <u+201c>there are elements of a bull market and a bear market at the same time,<u+201d> said andrew wilkinson, chief market analyst at interactive brokers. <u+201c>you<u+2019>re seeing pressure on different sectors. in a typical bull market, you<u+2019>re going to get all stocks going higher.<u+201d> <u+201c>it makes it very interesting for the stock picker and the active manager who<u+2019>s on his game,<u+201d> mr. wilkinson said. a volatility-related benchmark measuring expected average correlation among stocks<u+2014>the cboe s&p 500 implied correlation index, or jcj<u+2014>dropped to its lowest level ever according to data going back to 2008, said a spokeswoman for the exchange. that was a year before the current bull market in equities was just getting started, as central banks around the world kicked off unprecedented policies to bolster growth, helping lift asset prices across the board. the relationship between growth and value stocks in the benchmark equity measure has also decoupled, with the rolling correlation between the two groups sliding since voting day, factset data show. a republican sweep of the u.s. presidency and congress has boosted the inflation outlook, pushing investors into value names. before the election, investors crowded into growth companies in 2015 amid a sluggish economy and then poured money into low-volatility equities in the first half of this year. options trading also has ramped up amid the increased volatility and falling correlations. after months of calm and flat options volumes, volume on single-name options climbed 66% to 23.8 million contracts on nov. 9 from 14.3 million the previous day. the average daily contracts traded in november has surged 21% from the 2016 average of 14.5 million contracts, according to data from the options clearing corp. further clarity on the trump administration<u+2019>s policy plans could change the direction of the market. until then, credit suisse <u+2019>s mandy xu expects the dispersion trend to continue. <u+201c>a lot of people are asking if this is a regime shift in the u.s. rate environment,<u+201d> ms. xu said. the federal reserve increased interest rates in december for the first time in almost a decade after keeping them near zero since 2008. the weakening correlations could mean more opportunities for outperformance by active managers, said mike bailey, director of research at fbb capital partners, whose firm selects individual stocks for primarily high net-worth clients. the prolonged period of low volatility and high correlations have been hard on active managers, as many investors put their money into passive funds that mimic equity benchmarks. about $222 billion left u.s. stock-picking funds through october, the most ever in more than two decades and 29% more than last year, according to morningstar data going back to 1993. passive strategies continued to lure investors, attracting $144 billion this year. in the first 10 months of 2016, active domestic equity managers returned 3.9%, falling short of the 6% return passive managers posted, morningstar data show. but the tide may be about to turn for active managers as stock sectors continue to disperse and market players say the u.s. is on the cusp of higher interest rates. active managers could be able to point to 2016 as an example of how <u+201c>you can<u+2019>t always bank on passive,<u+201d> mr. bailey said. write to gunjan banerji at gunjan.banerji@wsj.com
sectors go wild: s&p 500 correlations crumble  - wsj
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