By Ben Levisohn July 14, 2018
It was another week with headlines that coulda, woulda, shoulda caused a mass market selloff. They did nothing of the sort.
The big headline was the Trump administration’s Wednesday announcement of additional tariffs on $200 billion in Chinese goods. The Dow Jones Industrial Average dropped more than 200 points that day, but climbed 562.93 points, or 2.3%, to 25,019.41 for the week. The S&P 500 rose 1.5%, to 2801.31—its highest level in more than five months—and the Nasdaq Composite gained 1.8%, to a record 7825.98.
Are investors ignoring the trade war? Hardly. It’s just that they’ve stopped trading “the market” and have instead focused their bets on stocks and sectors in a way that bears little resemblance to the risk-on/risk-off trading that has been dominant in the post-financial-crisis world.
In a risk-on/risk-off market, everything moves with the market. From 2010 through 2016, the 11 sectors of the S&P 500 had an average correlation of 0.82 with the overall index, explains Nicholas Colas, co-founder of DataTrek Research. (A correlation of one means that two assets move in lockstep.) Since then, correlations have been falling, with the average now around 0.59.
“We went from a market where everything moved largely together to one where sector fundamentals began to matter more than where the S&P 500 was going,” Colas says.
At the sector level, it’s apparent that no one has been ignoring tariffs. While the S&P 500 has gained 1.7% over the past month of trading, industrials and materials have dropped 2.5%, while financials have slumped 2.9%, hit by a double whammy of trade fears and a flattening yield curve. Utilities and consumer