Since COVID-19, this correlation has risen to 0.73, an increase of 27%. Individual performance has a smaller impact on stock movements in this environment than before. Different stocks are trading more and more like the same stock.
Of the 75 software companies tracked, only 5 saw a decrease in correlation with the market post-COVID. Below is a subset of a few of these companies:
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A few interesting takeaways:
- Zoom is the only stock that is negatively correlated with the software market. It also had the largest change in correlation, going from 0.59 to -0.03 since February.
- Salesforce and Workday, two of the largest software companies by market capitalization (nearly $200B combined), have a market correlation greater than 0.90. They are moving almost identically with the market.
- Before COVID-19, no company in this subset had a correlation over 0.75. Now, over half do.
- Square and Bill.com experienced the largest increases in correlation post-COVID. Bill.com is a direct recipient of the accelerated shift to digital caused by the pandemic and its stock price is up over 80% YTD. Square appears to also be a beneficiary — despite the struggles of its restaurant POS software business, its digital payments offerings are booming and its stock is up nearly 40% YTD.
This correlation increase hides relative weaknesses and strengths, equalizing companies that aren’t really equals and elevating lower-quality assets. As the software market corrects from newly set all-time-highs, expect the same phenomenon to occur in reverse and disproportionately hurt the best companies