Stocks, Commodities Moving in Lockstep: A Red Flag

Summary

WSJ Your Money Briefing Episode Summary: "Stocks, Commodities Moving in Lockstep: A Red Flag" Date: October 26, 2018 Host: J.R. Whelan (Wall Street Journal) Guest: Amrith Ramkumar (WSJ Markets Reporter)

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Overview

This episode centers on the recent phenomenon of stocks and commodities moving in near-perfect unison—a pattern that suggests heightened market volatility and sentiment-driven trading. J.R. Whelan interviews WSJ markets reporter Amrith Ramkumar to unpack what these correlations mean for investors, why they may be a red flag, and what’s behind the turbulence in global markets.

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Key Discussion Points & Insights

1. Unusual Market Correlation: What’s Happening?

[02:39]

• Summary: Both stocks and a broad range of commodities have been moving in the same direction, either up or down, which is not typical.
• Sentiment Indicator: High correlation often signals excessive optimism (when markets rise together) or, conversely, deep pessimism and risk aversion (when falling).
• Investor Dilemma: When assets previously considered diversifiers all trend together, it becomes harder for investors to seek refuge in less-volatile market pockets.

Notable Quote:
"A lot of these riskier assets, so stocks in the US, global stocks, a lot of the commodities, when they're moving in the same direction ... that can kind of indicate excessive sentiment in either direction."
— Amrith Ramkumar [02:42]

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2. Is There More Downside Ahead?

[03:32]

• Expert Views: Market participants cited in WSJ reporting expect further downside, particularly given persistent correlation and sizable intra-day market swings.
• Underlying Dynamics: Trading appears to be driven by nerves, not fundamentals. Panic and mechanical selling, rather than earnings or economic data, are directing moves.

Notable Quote:
"A lot of the moves seem very big and there are large intraday swings which tells people that this is just kind of jittery selling at various points and not necessarily people looking at fundamentals."
— Amrith Ramkumar [03:59]

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3. Measuring Correlation: How Linked Are Markets?

[04:23]

• Technical Details:
  • Stocks (S&P 500) & Global Stocks (MSCI All Country World Index): 20-day rolling correlation at 0.95 (almost perfect alignment)
  • Stocks & Commodities (S&P GSCI): Correlation at 0.8 (strong positive correlation)
  • Stocks & Gold: Correlation at –0.8 (inverse movement, with gold behaving as a haven)
• Interpretation: Closer to 1 means near-synchronous movement, closer to –1 signals perfect opposition.

Notable Quote:
"The S&P 500 and the MSCI All Country World Index ... the correlation is at 0.95, which as you just mentioned, that's pretty close to 1. So that means they're almost moving in perfect unison."
— Amrith Ramkumar [04:41]

"The correlation between The S&P 500 and the S&P GSCI index for commodities is now back at 0.8, which is again also pretty close to 1."
— Amrith Ramkumar [04:49]

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4. Are All Commodities Affected?

[05:38]

• Focus on Energy: The S&P GSCI index is heavily weighted toward energy commodities, especially oil, which has been declining sharply.
• Metals: Already depressed, metals are also experiencing more selling pressure; many investors are largely ignoring specific fundamentals, fueling indiscriminate selling across the sector.

Notable Quote:
"Oil has been falling a lot ... there are, yes, signs of increasing supply, which is fundamental, but also just signs on these days where everything is going down, that oil is falling a lot more."
— Amrith Ramkumar [05:58]

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5. High Volatility: “Hold Onto Your Seats”

[06:35]

• Market Swings: Major sell-offs and large single-day gains are becoming the norm; direction can flip quickly within the same day.
• Lack of Stability: When correlations are high, it’s difficult to find safe havens. Even strong company earnings or positive economic data haven’t calmed the turbulence.

Notable Quote:
"I think that's the idea that like you mentioned, hold onto your seats, because when you come in on any given day when markets are like this, you could see outsized moves in either direction and those moves can reverse as the day goes on."
— Amrith Ramkumar [06:56]

• Earnings Season Impact: Even with solid earnings earlier in October, market volatility persists, suggesting deeper structural worry.

Notable Quote:
"Earlier in October, people had said, okay, but once we get solid earnings data, the market might calm down. And this is again, kind of a sign that that hasn't really happened. This might be a bit more of a protracted period of weakness than what we saw in February."
— Amrith Ramkumar [07:10]

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Memorable Moments & Quotes

• On Correlation as a Red Flag:
  "When all of these things again are moving together, it makes it much harder to figure out what pockets you might prefer ... It's really kind of a gauge of sentiment in that regard." — Amrith Ramkumar [03:09]
• On Risk Aversion:
  "That's again assigned to some people that we're seeing really deep risk aversion. We're seeing a really big risk off mentality, kind of gripping markets even regardless of what's going on in the world." — Amrith Ramkumar [05:19]

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Timeline of Key Segments

• [02:39] – Introduction to the main issue: stocks & commodities moving together
• [03:32] – Discussion of downside risks and volatile swings
• [04:23] – Technical explanation of correlation and current market readings
• [05:38] – Breakdown of commodity indexes and focus on energy markets
• [06:35] – Volatility with outsized swings: “Hold onto your seats”

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Tone and Language

• The conversation retains an urgent, slightly cautious tone typical of financial markets reporting, emphasizing the potential risks and uncertainty facing investors.
• Amrith Ramkumar speaks in clear, accessible terms, focusing on the implications for everyday investors while also providing technical detail for more advanced listeners.

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Bottom Line:
The high correlation between stocks and commodities signals a period of elevated risk and sentiment-driven moves, with few places to hide and fundamentals taking a back seat to global nervousness. Higher volatility, sharp sell-offs, and rallies are likely to persist, making safe investment choices more challenging in the near term.

Transcript

[Announcer]

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[J.R. Whelan]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Stocks and commodities have been moving in lockstep as of late. We'll tell you in a moment why that could mean more dark clouds ahead for investors. First, these money in market stories you should know. A study by the group Childcare Aware of America says that parents in the US spent an average of $9,000 to $9,600 annually for one child's daycare last year. That's up about 7.5% from the previous year. And the pressure on household budgets is getting tighter. A married couple making the national median income of about $87,750 will have to devote 10.6% of their money for child care, up from 10.2% the year before. And for single parents, child care costs can eat up 37% of household income. The U.S. department of Health and Human Services is recommended. Child care costs should account for no more than 7% of family income. And like many of us, you probably didn't win much money in the recent Mega Millions or Powerball lottery drawings. But what if you won $180 million in the lottery? The Wall Street Journal Real Estate Bureau profiles California resident Rick Knudsen, who did just that and bought a $5.5 million, 16,000 square foot luxury mountain home on 50 acres and then spent millions more on an adjacent 155 acre Buffalo ranch. The house has an elevator, a gym, a wine cellar, a one bedroom guest apartment and a wraparound deck. On the grounds there are two barns, a caretaker's home, a stocked fishing pond and a five and a half mile hiking and driving trail. In all, he spent more than $11 million on property and buildings. Now he's listing the property for $22 million. See his story on WSJ.com. October's market volatility, which has included several deep sell offs, is revealing a very troubling signal for anyone who is waiting for Wall Street's turbulence to subside. And Wall Street Journal markets reporter Amrith Ramkumar is here with us to shed some light. So, Amrith, what's significant here is the fact that stocks and commodities are moving in large part in unison. What does that tell you about investor sentiment?

[Amrith Ramkumar]

Yeah, it's a really interesting topic because at any given time it can kind of give various signals Right. But basically the idea is that a lot of these riskier assets, so stocks in the US Global stocks, a lot of the commodities, when they're moving in the same direction, a lot of people think that they can kind of indicate excessive sentiment in either direction. So when all of these things are going up together, then that can kind of signal excessive optimism, which is what we saw in January, for example. And when they're going the opposite direction, it might be a sign that things are oversold and they might keep going that way until there's some sort of external event. So really people kind of use it as a gauge of where sentiment is and to see what areas of the market they could kind of seek shelter in. And so when all of these things again are moving together, it makes it much harder to figure out what pockets you might prefer. Anything like that. It's really kind of a gauge of sentiment in that regard.

[J.R. Whelan]

People you spoke with for your story say that there is more downside in the market to come.

[Amrith Ramkumar]

Well, the story went out, I think before Wednesday's really big rout in that sense. I think they're kind of right about that. But that is the idea. Right now a lot of the correlations are approaching one, which, which means a lot of stocks and commodities are moving in the same direction. And again, we're in this very down period for markets right now. So that is why I think that is the conclusion people would make. And again, a lot of the moves seem very big and there are large intraday swings which tells people that this is just kind of jittery selling at various points and not necessarily people looking at fundamentals like earnings or economic data. They're just kind of very nervous. And so that's again the thing we've seen in February, correlations had gotten really high during that sell off before it and then again during the sell off. And that's kind what we're seeing now

[J.R. Whelan]

again too when markets move together. It's called correlation. As you mentioned, correlation is measured on a scale of negative 1 to 1. Where has the market been on the correlation scale during this current period of volatility?

[Amrith Ramkumar]

The S&P 500 and the MSCI All Country World Index, basically a commonly looked at stock market gauge for global stocks. The correlation is at 0.95, which as you just mentioned, that's pretty close to 1. So that means they're almost moving in perfect unison on a 20 day rolling correlation standard. The correlation between The S&P 500 and the S&P GSCI index for commodities is now back at 0.8, which is again also pretty close to 1. And then if you look at the other side, so like for the S&P 500 and gold, which has been this cast aside Haven asset for almost the entire year, that correlation has become negative 0.8. So then they're moving the opposite direction. That's again assigned to some people that we're seeing really deep risk aversion. We're seeing a really big risk off mentality, kind of gripping markets even regardless of what's going on in the world. The big overlying theme again is when all of these things are moving together, people think that the fundamental global economic worries that have been out there for a while are kind of intensifying. And that's why we're seeing just deep risk aversion.

[J.R. Whelan]

Again, are we talking all commodities here when we're talking about the correlation during this period of volatility, or are there some commodities that are not on the table? Not part of the discussion?

[Amrith Ramkumar]

That's a really good question. The GSCI index I mentioned is very heavily weighted toward energy, so oil and other energy commodities. But it is a little bit tricky. I would say generally speaking, the answer is yes. So we've seen that oil has been falling a lot. And people have been saying in the oil market that there are, yes, signs of increasing supply, which is fundamental, but also just signs on these days where everything is going down, that oil is falling a lot more. Also a few days ago, for example, oil was down something like 4%, its worst day since July. And things like that have been happening with increasing frequency across commodities. So a lot of the metals, for example, were already so beaten down that when these things happen again, people are inclined to sell. And that's really the worrying sign that people aren't really looking at the fundamentals again, to some analysts.

[J.R. Whelan]

And the volatility that we've seen this year, especially this year, has featured lots of sell offs, but also days of enormous gains, one day gains like we have seen on Thursday. It's really like, hold onto your seats, right?

[Amrith Ramkumar]

And the flip side is also true, right? Today is Thursday and we're seeing like a big rally across all these risky assets again generally. So I think that's the idea that like you mentioned, hold onto your seats because when you come in on any given day when markets are like this, you could see outsized moves in either direction and those moves can reverse as the day goes on. So that's again why the higher correlations are worrying, because there aren't pockets of stability as much. Even with all this earnings and economic data, we've seen a lot of people again coming into this earnings season. Earlier in October, people had said, okay, but once we get solid earnings data, the market might calm down. And this is again, kind of a sign that that hasn't really happened. This might be a bit more of a protracted period of weakness than what we saw in February.

[J.R. Whelan]

Okay. That's Wall Street Journal reporter Amrith Ramkumar joining us here in our studio. Amrith, thanks for being with us.

[Amrith Ramkumar]

Yeah, thanks so much for having me.

[J.R. Whelan]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[Announcer]

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