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      Correlation confusion: We are converging on only one trade - beware the vol spike

      Quant star gone strat star; so nerdy that he is actually super-cool, Inigo Fraser Jenkins highlights that there is effectively only one trade within the equity market as stocks are moving together as closely as they ever have done historically both across the market and within sectors.

      What is also unusual is the extent to which factors are as tightly correlated. In the US Momentum, growth, quality and low vol have a correlation that is approaching +1, and their correlation with value is approaching -1. Correlations jumped higher with the impact of the virus but have not fallen back due to central bank liquidity support. Usually value stocks go on to outperform from such points but prior examples were at times when there was a temporary increase in risk aversion followed by rebound. The nature of the current crisis is different. Momentum tends to do badly from such moments of high correlation but given the divergence between the market and fundamentals it would be hard to argue that there has to be a near-term change in leadership. There is also a notable size skew to the current market. While the average high momentum stock is expensive compared to the average low momentum stock, on a cap weighted basis valuation of high momentum is not excessive. The very high correlations imply a tough environment for active managers and suggest that having a concentrated fund would help them to outperform. High factor correlations make getting the factor trade right key, but also tell us that there essentially only is one factor trade rather than a set of them. That is a worrying set up as it is preferable to have several dimensions to risk taking.

      The one-trade nature of the market means that vol could rapidly spike if there is any hit to the current narrative.

      Correlation confusion: We are converging on only one trade - beware the vol spike
      Source: Sanford Bernstein
      Amazing cycle

      All of a sudden this US cycle is the 6th longest in history. It will enter the top 5 if we avoid a 2026 recession.

      Amazing cycle
      Source: NBER
      US unrivalled

      Unparalleled access to private capital (around 20 times greater than the next-largest market) has helped finance the current wave of pioneering AI investment and innovation. US private AI investment reached $285bn in 2025, more than 20x as much as in China.

      US unrivalled
      Source: Stanford