Goldman Sachs Global Investment Research
"Evidence that macro is driving markets: Stock return correlation has been trending higher and has recently surged back to the average level of 2013."—Goldman Sachs chief U.S. equity strategist David Kostin.
In recent weeks, we've seen the return of "risk-on, risk-off" (RO-RO) trading in the markets.
What this means is that assets across a range of markets move up and down in unison, reacting to good or bad news together in lockstep.
When good news (risk on!) comes across the wire, market participants are buying risky assets (like stocks and emerging-market assets) and sell safe-haven assets (like government bonds and gold). Conversely, on bad headlines (risk off!), market players are dumping risky assets and piling into safe havens.
Correlations between assets have been rising, typical of a "RO-RO" trading environment in which investors' focus turns away from picking individual winners within an asset class and toward just being on the right side of broader market moves in general.
"The irony of this week’s client discussions is that just when investors wanted to focus on micro data points, market activity swiveled decisively in the direction of macro news flow," says David Kostin, chief U.S. equity strategist at Goldman Sachs.
"While 50% of the firms in the S&P 500 have released 4Q results during the past few weeks, company-specific news has been overshadowed by developments in emerging economies and markets, which in turn affected developed equity markets."
Kostin cites turmoil in emerging markets and the recent turn lower in the U.S. economic data relative to forecasts as major forces behind the return of RO-RO.
"Despite the wishes of many U.S. equity investors, the dominance of macro over micro news will persist, especially during the next week," warns Kostin.
"We expect equity markets will focus on U.S. macroeconomic data and what it suggests about the trajectory of growth."
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