What’s the Relationship Between the US Stock Market and the ASX?

Today we look at the connection between the S&P 500 Index [SPX] and the ASX 200 [XJO].

A common question is; what relationship does the US stock market have with the ASX?

For those not familiar with this link, the ASX frequently follows the overnight trade in the US market higher or lower.

The evidence bears this out over a long-time frame:

ASX XJO Share Price Chart

Source: tradingview.com

If you take 1983 as the starting point, you can see a strong and relatively consistent correlation (bottom pane) through to the present day.

XJO (yellow line) actually outperformed the S&P 500 Index through to the lead up to the dotcom bubble (first arrow).

And with less of a tech focus in Australia at that point, it makes sense that correlation went negative for a period during the bust.

During the GFC, something interesting happened.

The ASX 200 actually outstripped SPX by a fair margin, but the two indices were moving in lockstep by this point.

Subsequently the correlation continued through to the present day.

What’s happening with SPX and XJO now?

If we zoom in on the recent performance of both indices, a couple of things jump out.

You can see the correlation coefficient is waning recently in this chart:

ASX XJO and SPX Share Price Chart

Source: tradingview.com

And if we change the length of trading days to calculate the correlation to five days, you can see it actually went negative in the last week:

XJO share price chart - SPX

Source: tradingview.com

This makes sense: the US market kept chugging along last week while the ASX went backwards or at least stalled.

XJO weighed down by lockdown

The number of cases in the US isn’t stopping the rally it seems, whereas the recent lockdown of Victoria in Australia is likely weighing on sentiment here.

The estimated total cost of the Victorian government lockdown policy stands at upwards of $12 billion.

This means more job losses, hits to earnings of Melbourne based companies, and constrained consumer spending.

But with the US, the market seems to leap on any positive vaccine news, regardless of a potential earnings wake-up call in the near future.

You can also see that since the March market lows, SPX is strongly outperforming XJO.

Does this mean all the action is over there?

Not necessarily, it could also mean a harder fall.

And based on the past positive correlation, this could drag the ASX down with it.

If you want the bear-case for the ASX, you can find that right here. In it, our editor Vern Gowdie outlines the case for a ‘double bottom’ in the context of an array of valuation metrics. It’s an excellent read. Download.


Lachlann Tierney,

For The Rum Rebellion

Lachlann Tierney is a writer for The Rum Rebellion and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. 

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