Co-movement of Fundamentals: Structural Changes in the Business Cycle

The co-movement of stocks and of fundamentals changes across the business cycle. Empirical studies have shown that the correlation of stock returns is stronger in crisis. We show that the correlation of fundamentals is the highest during crisis using a large sample of quarterly firm revenues aggregated to industry data from 1969 to 2009. The results of our study indicate that the co-movement of stocks is driven by the co-movement of fundamentals and is not an irrational reaction of markets. Both correlations between industries and the aggregate market and correlations between earnings confirm our findings.