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Asset Correlations and Market Crashes

During a market crash, varying assets begin to positively correlate with each other

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May 18, 2020
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The greater the fear, the greater the chance that correlations between different asset classes will begin to merge closer to 1. Overtime, this makes the investment universe less and less protected against risk. Theoretically, the correlation between corporate debt with a BBB rating issued by a company with a $10B in debt, $50M in cash, and negative free cash flow should be drastically different than corporate debt issued by a company with an AA credit rating, no debt, and high free cash margins. Yet in October 2008, we found over 50 cases where such disparate corporate debt traded at a nearly perfect 1.0 correlative factor. Go figure.”

- Simon R. Bellows

Asset correlation is a measure of how investments move in relation to one another and when those movements happen. When assets move in the same direction at the same time, they are considered to be highly correlated. When one asset tends to move up when the another goes down, the two assets are considered to be negatively correlated. Fidelity describes correlation on a range from 100% to -100%. In their “The Pros Guide to Diversification,” they state:

“Correlation is a number from -100% to 100% that is computed using historical returns. A correlation of 50% between two stocks, for example, means that in the past when the return on one stock was going up, then about 50% of the time they return on the other stock was going up, too. A correlation of -70% tells you that historically, 70% of the time they were moving in opposite directions—one stock was going up, and the other was going down. A correlation of 0 means that the returns of assets are completely uncorrelated. If two assets are considered to be non-correlated, the price movement of one asset has no effect on the price movement of the other asset.

In a great article by Mark Maggiulli of Marker[1], he pointed out the difference between correlation of returns between assets during the credit asset market crash in 2008 to 2009 and the market crash in February to March of 2020. In the former crash (see Figure 1), the red lines show a positive correlation between the higher risk assets such as U.S. stocks, international stocks, REITs and emerging markets equities. Conversely, the blue lines show a negative correlation between lower risk assets (such as 20 year treasuries) versus the entire higher risk category of equites. In the coronavirus crash of 2020, it’s easy to see the panic setting in as nearly every asset correlation showed a positive correlation with every other asset class (see Figure 2).


Figure 1: +/- Correlation Between Risky and Non-Risky Assets: Credit Asset Market Crash 2008-2009. Source:


Figure 2: + Correlation Between Risky and Non-Risky Assets: Coronavirus Market Crash 2020. Source:

Two clear differences between the credit asset market crash in 2008 and the coronavirus crash in early 2020 were the speed in which the crashes took place and the drastic differences in correlations between “risky” and “safe” asset classes.

Time and correlation in the 2008 crash

In the credit asset market collapse, the bear market took a series of cascading events that brought the market to its final lows. Events such as Bear Stearns’ collapse, Lehman Brothers’ bankruptcy, the AIG/Freddie and Fannie bail outs all led to a slow drawdown in the markets followed by a relatively classic recession. The only difference was the length and duration of the recovery, with some industries disappearing entirely.

Unemployment peaked at roughly 10.5%, or less than half of the Great Depression levels. During this crash and ensuing recession, Figure 1 shows that there was both positive and negative correlations between asset classes. There was a positive correlation between risky assets (domestic and U.S.-stocks moved in a similar fashion), but there was a negative correlation between higher risk assets (stocks, real estate, etc.) and lower risk assets (bonds, treasuries, etc.). As stocks went down, bonds remained flat or increased in value.

Time and correlation in the 2020 crash

The coronavirus crash has been like nothing I’ve seen in my investing career. Compared to the credit asset market crash, the coronavirus crash exploded onto the world stage in roughly 60 days. By March 18, the S&P 500 was down 27% year-to-date, the German DAX was down 38% and the Japanese Nikkei was down 29%. These drops mostly happened in just 45 days or less. The credit markets came under enormous strain, and even U.S. Treasuries were sold in droves. In a mere month, the entire global economy seemed to have suffered a massive cardiac event.

Combine this with a global pandemic that went from roughly 100 confirmed cases in January 2020 to over 4,000,000 confirmed cases by May 2020, with over 300,000 confirmed deaths worldwide and nearly 90,000 confirmed deaths in the U.S. by May. Unemployment in the U.S. jumped by roughly 30 million in just six weeks, reaching unemployment rates we haven’t seen since the Great Depression.

The speed and scope of the crash was like nothing we’ve seen since the Great Depression. Equally important, as Figure 2 shows, is that there was absolutely no place to hide (save cash), as nearly every asset correlation factor went to 1.

Looking forward

You often hear that investors get caught fighting the current war with the last war’s weapons. That was certainly the case in this year’s crash. While investors worried about asset prices, debt levels and valuations (which all mattered), no one could possibly have guessed a global pandemic would close down the entire global economy and suddenly having us face a global depression. As always, I think there are several key takeaways from such debacles in the market place.

Cash will always be king

During downturns, cash is the only asset with liquidity, value and stability that can save investors from significant losses. At Nintai Investments LLC, our average investment partner portfolio had somewhere between 15% and 30% of assets under management in cash. We didn’t have any special crystal ball which foresaw a market crash or a global pandemic. Rather, we saw nearly every asset class was (and still is) overvalued. This could mean only one thing: during a crash, nearly every asset would be equally correlated to its neighbor, from U.S. stocks to emerging market stocks to global debt. Nearly every overpriced asset would see a dramatic drop in value, but cash would not

Panic leads to matching correlation

When a real panic sets in, you will see investors selling nearly every investment they can lay their hands on, whether it be municipal bond mutual funds or triple leveraged oil futures funds. Panic selling impacts everything from the credit markets to the real estate market to precious metals and other commodities. Figure 2 shows that the latest crash brings nearly every asset class into perfect correlative alignment.

Matching correlations provide no hiding place

I’ll be the first to admit that I’m very old fashioned when it comes to creating portfolios. I don’t like to try any type of new sexy “triple negative/positive absolute return exceptional fund” that nearly (but not always of course) states that you won’t lose money in such a fund. I’ve found that the more words in the name of a mutual fund, the lesser chance an investor a.) understands the fund's strategy or b.) even remotely sees it hit its target returns over time.

At Nintai Investments, we tend to purchase only two things – publicly traded equities and a money market sweep account that holds assets as close to cash as possible. Very rarely do these two have positive correlations. Generally, stocks either go up or down and the money market fund goes nowhere. In this model, a generous percentage of our client AUM does nothing – it remains as an anchor preventing exorbitant losses (and exorbitant gains).

This yin and yang of correlative values has allowed my portfolios at Nintai Partners and Nintai Investments to reap significant gains in market crashes. The past few months have been no different. If it means I lose several points to the upside while saving double digit losses on the downside, I am very comfortable with this model.


The past quarter gave investors that rare insight when assets across the spectrum all had near perfect correlation with each other. When this happens, it mean one (or more) of several things. First, all assets are equally overvalued and the markets recognize them as such. Second, investors have reached a stage of complete and utter panic where they sell all assets regardless of type, their portfolio role, or their valuation.

At Nintai Investments, we believe the sudden correlation of so many assets was a mix of both reasons. Investors have been part of a bull market that – with several minor exceptions – has seen markets (both equities and bonds) rise for nearly 10 straight years. In addition, in a very short three month period, the entire global economy collapsed under the weight of a new virus. Finally, many investors were "fighting the last war" by looking for issues related to credit or real estate.

A rather simple lesson we have learned from this recent crash has been to keep your portfolio design and selection as simple as possible. This doesn’t mean use only three index funds or two asset classes, but rather create a model that can easily adjust for rapid changes in the marketplace and the outside geopolitical and economic conditions. It might be as simple as moving 2% of your AUM into cash for every point above the markets’ fair value as calculated by Morningstar. Whatever you choose, make sure that it is simple and allows you to sleep at night.

As always, I look forward to your thoughts and comments


[1] “How the Coronavirus Crash Is Different From the 2008 Financial Crisis,”, Mark Maggiulli, March 31, 2020.

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