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In a preview of his WSJ column, Senior Writer Jason Zweig reports on the correlations between various markets assets, and why seemingly unrelated assets appear to rise and fall together.

Is there no end to the contagion?

This week, as the Italian government and Italian bonds collapsed over fears the country can't control its debt, everything else fell, too. Of the 45 national stock markets in the MSCI All Country World Index, 38 went down on Wednesday, with only a handful of Asian markets up a hair. Real-estate stocks, high-yield bonds, crude oil and gold all dropped.

Then, when the outlook in Europe seemed to brighten Thursday and Friday, just about everything that had gone down in lockstep went up in unison.

But while it might feel like all investments on earth have suddenly been lashed together with a single bungee cord that is yanking them up and down together, assets are no more closely linked today than they have been over much of the past decade.

The technical term for market linkages is "correlation." If assets always moved up and down in exact unison, they would have a perfect correlation of 1.0. But most assets sometimes move up and down in lockstep and sometimes go in opposite directions. A correlation of 0.8 shows a high tendency to move in tandem, for example, while a reading of 0.2 suggests that one asset tends to zig when the other zags.

Christophe Vorlet

"The facile answer is that in a crisis, correlations move to 1.0," says Howard Simons, strategist at Bianco Research in Chicago. "But there's more differentiation going on recently than people might realize," he adds.

According to data from MSCI, which tracks stock indexes around the globe, the average monthly correlation of the U.S. with the other countries in the MSCI World Index is 0.80—not far from the maximum 1.0. But at the end of April, days before most stock markets peaked world-wide, that relationship stood at 0.81. At the end of last year, it was 0.82; in March 2009, it was 0.87. Over the past 10 years, it has averaged 0.78.

So, while U.S. stocks are moving very much in tandem with those of other markets, they are less linked than they have been in the recent past.

But, points out Mr. Simons, the correlation with emerging-market equities has been falling lately.




But that doesn't mean they can't go higher—or that investors should ignore the problem altogether. The U.S. and much of Europe must solve many of the same issues. Chief among them: rising debts and deficits, which could lead to inflation and currency weakness.

Many investors may wish to protect against those risks in particular. Inflation is devastating to bonds, and a falling dollar can be harmful to a variety of financial assets held by U.S. investors.

Investors who want to guard against these risks should pick up assets that are less vulnerable to a falling dollar, inflation and rising interest rates.

One way to do that, says Mr. Simons of Bianco Research, is utility companies. Since most of them have only minimal revenues outside the U.S., they aren't vulnerable to a weakening dollar.

And since the rates they charge their customers tend to move upward at a fairly steady pace regardless of inflation or interest rates, utilities are relatively insulated against those risks as well.

The simplest and cheapest solution is an exchange-traded fund like iShares Dow Jones U.S. Utilities, SPDR Utilities Select or Vanguard Utilities, all of which bundle several dozen stocks yielding 3% to 4% at an annual expense of under 0.5% of assets.

Utilities have always been a way to get decent income; now they look like an intriguing way to get at least some protection from further contagion.

Write to Jason Zweig at

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