Given our interest in the potential for a “forthcoming golden age of stock picking” we wanted to highlight a couple of posts that highlight the current state of the markets. At least on the country selection front there is a ray of hope for active managers.
Bill Hester at Hussman Funds* notes how in the global equity markets there is a growing spread in country returns. Thereby making country picking strategies potentially more lucrative. He writes:
More recently through 2007 the divergence in stock market returns among developed countries collapsed. There was very little value in making distinctions at the country level when individual country returns were so tightly centered about broad benchmark return levels. These trends have shifted the last couple of years and the recent spread between relative performances continues to widen.
He notes that some of this divergence has to do with the relative concentration of the banking sector on index returns. The guys at Systematic Relative Strength chime in thusly:
The greater the dispersion in returns, the more likely relative strength is to be able to deliver superior performance over a benchmark index fund. If we do indeed see much greater divergence in country returns going forward, relative strength is well-positioned to capitalize.
The general point being that as relative economic performance diverges across the world we should expect to see some continued divergence in country returns. Relative strength being one method to take advantage.
On the domestic front, there is little in the way of divergence. Today Zero Hedge highlights some research showing a continued increase in cross-equity correlations. In short, stocks are moving more and more alike these days. They quote Matt Rothman of Barclays:
To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either the run-up or the bursting of the Internet Bubble, or after 9/11. The reason this matters to all stock pickers — fundamental or quantitative — is because with stock return dispersions at all-time lows, it is extraordinarily difficult to be picking stocks.
One can argue whether that has do more with the macroeconomic situation or the rise of high-frequency trading. We would add increasing interest in sector ETFs as another contributing factor, as well. One would think that at some point this trend will reverse.
This could come through an adverse market event, as ZH surmises, or from the renewal of a bull market. In either case, stock selection would once again come to the fore. Individuals can’t trade like high frequency traders or proprietary trading desks. By necessity individuals need to have a longer time horizon than these market players. Therein lies the opportunity for dedicated investors.