It’s generally well known that the UK market closely follows the movements of the US market. But it hasn’t always been like this.
The following animated graphic shows the correlation of monthly returns of the FTSE All Share and S&P 500 indices for the decades since 1950.
[NB. Press Ctrl-F5 to refresh page and restart animation.]
In the 1950s and 1960s there was negligible correlation between the UK and US markets on a monthly basis. The US market might rise one month and the UK would respond by rising or falling – there was no connection.
In the 1970s some evidence of correlation can be seen for the first time – although it was still very weak.
It was not until the 1980s that the correlation became statistically significant. There could be many reasons for this increase in correlation, but one contributing factor was undoubtedly the increasing presence of computers in trading rooms. And, of course, the October crash in 1987 would have alerted many for the first time to the scale of the inter-connectedness of worldwide markets.
Correlation stayed at a similar level in the 1990s to that reached in the previous decade.
But it has been in recent years that the level of correlation has soared – to almost double the level seen in the 1990s. This can be clearly seen in the last two charts, where the points are closely aligned along the line of best fit.
The level of correlation between the UK and US market is now so high that the usefulness of independent analysis of the larger-cap UK market indices must now be moot.