DEFINITION of Recoupling
Recoupling is a market event or process when returns on asset classes revert back to their historical or traditional patterns of correlation. This is in contrast to decoupling, which occurs when asset classes break away from their traditional correlations. The movements of different classes of assets relative to one another have exhibited patterns of correlation ground in academic theory as well as empirical evidence over time. At times, the correlations decouple, causing market observers to search for explanations. The decoupling period can be brief or long but eventually asset class behavior should recouple to historical norms. It would be rare if a relationship broke, but if it does occur, there would be a strong suggestion that an external factor not present in traditional models is now at work.
BREAKING DOWN Recoupling
There are many sets of market correlations that are taken as a given. Some examples: rising bond yields mean a strengthening of the currency; rising interest rates cause equity markets to slow down in appreciation or even depreciate, while falling interest rates support equity markets; strengthening of a currency of an export-dependent country leads to a fall in the stock market of that country; a climb in the price of oil and other global commodities accompany the weakening of the U.S. dollar.
Markets can behave irrationally, so it should not be a surprise when long-standing relationships - supported by many decades of data that can easily be depicted on charts - break down for a period of time. Decoupling is becoming more commonplace; even the Federal Reserve has been flummoxed once in a while by a market "conundrum" (Chairman Alan Greenspan on the narrowing of short-term and long-term rates in the midst of Fed interest rate hikes). However, recoupling, for whatever asset classes in question, is still expected to occur by academics and analysts who make a living out of predicting behavior of markets, but they might find it necessary to continually fine tune their models to stay current with market complexities.