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In August, China dominated and volatility soared. As stock indices plummeted, dispersion was low and correlations high - meaning little value could be added by picking the right stocks, and diversification offered little if any protection.
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There were large movements in most stocks, in the same direction and of similar magnitude. In other words, volatility rose just as dispersion fell - a rare combination and a particularly difficult environment for investors to navigate.
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Extraordinarily high correlations tied performances together. August’s 0.81 average stock-to-stock pairwise correlation in Europe is the highest on record. For the S&P 500®, correlation rose to its highest in four years. Leading into a closely watched U.S. Federal Reserve meeting in September, continued high correlations will amplify the market's response, raising the stakes for investors.
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