S&P 500 correlation - a gauge of herd behavior, which measures how closely daily returns of index constituents align over a month - slipped to 0.22 at the end of June, close to the lowest since November 2021, according to data from S&P Dow Jones Indices. That means that many stocks are moving in different directions.
That would typically lower risk and offer more opportunities for stock pickers. But with the bulk of the market's gains being driven by a handful of mega cap names and a crowd of market bets on continued low correlation, investors may be relying on a false sense of calm. The low correlation now is in stark contrast to late last year when investors were laser-focused on macro factors including employment, growth and inflation, leading stocks to move in sync.
"Given the narrowness of the market so far this year, we suggest investors consider an S&P equal-weight strategy or U.S. mid-caps for cash earmarked for U.S. large caps," said Jack Ablin, chief investment officer of Cresset Capital.
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