Correlations Down, Active Management Up

Brandon Snow's picture

Correlations Down, Active Management Up

Following the U.S. government shut down (non-event), we have seen a very strong rally across stock markets with the S&P 500 Index reaching new highs. While Q3 results were okay, this rally continues to be driven by multiple expansion rather than upward earnings revisions. Today, the stock market is fairly valued on an absolute basis and annualized standard deviation total returns are what we can reasonably expect from the indexes.

The good news is that we buy stocks, not the market. We are bottom-up investors looking for opportunities around the world, which we are continuing to find. These are not as attractive as they have been in the past, meaning we have to remain patient in putting capital to work. Our cash levels are in the high teens right now. What is making it easier for us is the fact that single stock correlations have fallen dramatically. See the chart below.

Source: Bloomberg

This is great news for U.S. stock pickers who do not invest in the index. For a number of years the markets were held hostage to macroeconomic noise, with risk-on/risk-off trades dominating fundamentals. For a year now, we have seen a lessened impact of this noise on the markets giving us an opportunity to participate in the value creation of the companies we invest in. While there still are some big picture concerns that exist, we are looking forward to a stock pickers market for as long as it lasts.


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