Bear Market Warning: Stock Sync Slips to Alarming Low

​If Wall Street had a canary in the coal mine, it might just be stock correlation—and right now, that bird is barely chirping. According to market veteran Jim Paulsen, stock movements are more out of sync than they’ve been in decades, and history says that could be a red flag for investors.

Here’s the lowdown: when stocks in the S&P 500 all move together, it usually means fear is in the air—traders are running for the exits without checking ticker symbols. But what about now, when everything seems to be marching to its own beat? That’s when things get tricky.

Paulsen, the former chief strategist at Wells Fargo’s institutional asset management group, points out that intra-stock correlation is scraping a 25-year low. Translation: stocks are behaving like they’re at a free-for-all party, not a coordinated dance. And that kind of chaos has often set the stage for market pain.

Since 1980, six of the last eight bear markets kicked off when correlations were low. That’s not a guarantee of doom, but it’s a warning shot. Even more telling? When correlations were high, markets tended to perform better. In fact, the S&P 500’s average return was nearly three times higher during high-correlation periods compared to low-correlation stretches.

Why is this happening now? Blame it partly on Big Tech. The megacaps have been crushing it while the rest of the market lags, creating a lopsided market. Add in a chronically inverted yield curve, a Fed that’s been holding the line on rate cuts, and a rare streak of 16 months of negative money supply growth, and you’ve got a recipe for confusion.

Paulsen also suggests that investors aren’t nearly as gloomy in their trades as they are in surveys, hinting that actions speak louder than sentiment. Still, he warns that when a bull market matures, correlations tend to fade. And fading correlations usually mean fading returns.

In short, don’t be lulled into thinking a scattershot stock market means more opportunity—it might actually mean more risk. For now, investors may need to buckle up and wait for alignment to return before smoother sailing begins.
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