Time for stock pickers to earn their salt


Stocks have tended to move as a herd after the financial crisis in a market punctuated by “risk-on” rallies that lift stocks across the board, and “risk-off” declines in which few are spared.

However, as the bull market ripens, there are signs that investors are distinguishing more between potential winners and losers, reports David Randall for Reuters. He writes:

Implied correlations – a measure of how closely the performance of individual stocks mirrors that of the index itself – have fallen to their lowest since October 2007 after peaking in 2011, according to a research note from Cantor Fitzgerald. That means that instead of the returns of most stocks clumping close to the index returns, there is a much broader spread on how individual shares are performing.

Randall adds:

Stock pickers are doing well in part because after more than four years of marching higher en masse, stocks have started to separate themselves into leaders and laggards. The lines of demarcation became more pronounced during the past few weeks as U.S. companies reported their recent quarterly results.

During the early phases of an economic expansion, rising profits tend to lift all boats. Yet as the recovery matures, correlations tend to fall, which provides more opportunities for stock pickers to potentially generate alpha, or incremental outpeformance. In other words, the performance of individual stocks is driven more by fundamentals rather than just the direction of the overall market.

Falling correlations are just one reason why Covestor thinks active management is alive and kicking. When choosing stock pickers, we think the right approach involves a transparent marketplace of up-and-coming active managers, as well as full transparency and liquidity.

Read more about our investment philosophy.

Photo Credit: Ry Pepper

Disclaimer: All investments involve risk and various investment strategies will not always be profitable. Past performance does not guarantee future results.