Four companies – Microsoft, Apple, Google and Amazon – are 14% of the S&P 500. Their weightings: MSFT (4.3%), AAPL (3.9%), GOOG/L (3.0%), and AMZN (2.9%). If they were their own “sector”, these 4 names alone would be more important to US equity markets than either Health Care (13.6% weight) or Financials (12.9%).
That got us to wondering: how do these names trade versus the S&P 500 in terms of correlations? Are they even stocks any more, or just high-beta calls on US large caps? And have these correlations changed over the last 9 years as they have become an ever-larger part of the S&P?
Here are the answers to those questions, with 4 charts at the end of this section:
#1: Their average correlations over the last 9 years are lower than we thought would be the case. We took daily price returns for each and ran rolling 90-day trailing correlations to S&P 500 daily returns. The results:
- Microsoft: a 0.67 average correlation (r-squared 45%)
- Apple: a 0.56 average correlation (r-squared 31%)
- Google: a 0.63 average correlation (r-squared 40%)
- Amazon: a 0.56 average correlation (r-squared 31%)
#2: But in all cases the correlations are higher for both the last 90 days and 2019 as a whole:
- Microsoft: most recent correlation is 0.86, 2019 YTD average 0.84
- Apple: most recent 0.82, 2019 YTD average 0.76
- Google: most recent 0.66, 2019 YTD average 0.68
- Amazon: most recent 0.76, YTD average 0.79
- This increases the current r-squares to at least 44% (GOOG) and all the way to 75% (MSFT)
#3: There is no discernable historical pattern to these correlations over the last 9 years, although in 3 of 4 cases “peak correlation” has come in the last 2 years:
- Microsoft’s peak correlation to the S&P was in December 2011 at 0.91.
- Apple’s peak: March 2019 at 0.86
- Google’s peak: April 2018 at 0.88
- Amazon’s peak: February 2019 at 0.86
Our takeaways from this data:
- Yes, correlations are higher now than over the last 9 years. That makes sense given the long run performance of these names, which now puts them at the top of the market cap leader board.
- But these correlations can shift quickly, as the charts below show. There are no smooth lines in any of them.
- Bottom line: current above-average correlations show that MSFT, AAPL, GOOG and AMZN are certainly tied to the fortunes of the S&P 500, but to varying degrees.
- As a one-stop explanation for the differences, we would point to regulatory concerns, which are inversely proportional to how closely these stocks trade to the overall market. Google and Amazon’s correlations to the 500 are lower than Apple’s, and Microsoft’s is the highest of all. Reverse that order and you have a reasonable ranking of how much each company’s business model faces scrutiny from federal and state regulators and policy makers.