Sometimes, it just doesn’t matter how strong a company’s earnings prospects are. When volatility spikes in the financial markets, traders and investors will just dump everything.
This is one of the more intuitive manifestations of behavioural biases in the stock market.
RBC Capital Markets’ Jonathan Golub shared this telling chart in his new 84-page Investment Strategy Playbook.
It tracks the fluctuations of S&P 500 pairwise correlations and the CBOE Volatility Index (VIX). The correlations reflect the degree to which stocks move in the same direction with each other. The VIX is a rough reflection of fear and panic in the market.
As you can see, spikes in the VIX coincide lead correlations.