When do stocks experience the highest correlation volatilities?

Stocks typically exhibit the highest correlation volatilities during periods of uncertainty. During these times, market participants react more strongly to macroeconomic news, geopolitical events, or changes in market sentiment, leading to a higher correlation among stocks. When uncertainty prevails, investors often withdraw from individual stock analysis and instead react to broader market signals, causing stocks to move together in response to the same external factors. This phenomenon can lead to increased volatility, as the market is more reactive and interlinked.

In contrast, during economic expansions or periods considered "normal," the correlations between stocks tend to be lower because investors are more engaged with individual stock fundamentals, allowing for more variation in stock performance based on company-specific factors. Recessions also have a degree of heightened correlation but often not as pronounced as during periods of significant uncertainty. Under recessionary conditions, while correlations may increase as many stocks are negatively impacted, the volatility in correlation is typically lower than during times when the market is reacting to unexpected events or changing conditions.