Why a global stock market correction may be on the horizon?
We have already entered the last month of 2021 and the Dow is not far from its all-time high. The Nasdaq isn't far from a record either. The Dow is up 13.2% on a YTD basis and by almost 15% if you look at the last 12 months.
In case you haven't noticed, there are plenty of things for investors to be worried about.
The new spike in Covid-19 cases across Europe, concerns about rising inflation pressures and how the Federal Reserve will respond to it, and the chaos for other reasons in different parts of the World all threaten to derail the market's bull run.
That's led to increased worries that stocks may soon experience a so-called correction, defines as a 10% pullback from recent highs.
At Anh Thomas Investment, we believe that the US stock market is quite massively overpriced at the moment. This might have consequences on all the other stock market worldwide. Why? Because of correlation.
International stock correlation for stocks is not something that investors should overlook.
We all know that stocks fluctuate over time but something maybe less obvious is that stocks in different parts of the world tend to move in the same direction at the same time. In other words, stocks around the globe exhibit a high level of correlation. Many studies have already demonstrated that volatility is contagious across markets. Not only that, but this international correlation tends to be even stronger when it matters the most that is when market volatility is high. Studies have also shown that correlations have increased over the last decades. One of the reason that can help explaining this trend is that there is more and more foreign participation in the world’s stock markets. We will keep discussing this in future posts, keep tune for more!