History has shown us that when investors get scared they think in a "risk on" / "risk off" mentality - regardless of the asset class. These knee-jerk reactions cause an unprecedented amount of correlation in the market. The following chart does a nice job of showing how fear contributes to the overall correlation of stocks in the S&P 500 dating back to 1986.
More recently, you can see peaks in correlation around the Great Recession, fear of a double dip recession, uncertainty surrounding the Eurozone's debt calamity, and the possibility of global contagion.
Source:
www.ritholtz.com
