There's one metric that shows investors are being pickier about the stocks they buy
One measure of the stock market shows that investors are going to have to get more savvy about picking bets in the future. A metric called the three-month intra-stock correlation in the S & P 500 has moved to essentially zero, the lowest level in data going back to 1990, according to Truist Wealth. That shows that stocks in the broader index are now moving independently of one another, at a highly unusual level of dispersion. What’s even more interesting is that a closer look at the index shows that much of that dispersion is in technology, where investors are getting more choosy inside the artificial intelligence story, as well as in consumer discretionary stocks, according to Keith Lerner, investment chief at Truist Wealth. Other sectors such as financials and health care are moving more in tandem with each other, benefiting from the rotation out of semiconductors. “What you’re really just seeing is more winners and losers,” Lerner said. “It’s not just one overall trade. It’s not just one big macro trade. It’s really getting down to company fundamentals.” Stock pickers’ market Lerner is not the only one noting the low correlation and high dispersion in the market. Steve Sosnick, chief strategist at Interactive Brokers, is following his own yardsticks, and said that the sanguine performance this summer of the S & P 500, which is near all-time highs, has masked a high degree of individual stock volatility. That’s a key reason why the equal-weighted S & P 500, in which the largest stocks are treated the same as the smallest, has quietly outpaced the cap-weighted index this year, and why value stocks have been outperforming growth. And why small caps have been outpacing large caps, and why many parts of the investable universe are actually doing better this year than the megacap technology companies. It could also mean risks are building for a crowded market that’s over-indexed to technology companies, though Nvidia ‘s results Wednesday, and subsequent rally, may have helped give the stock market a quick, short-term boost. Other risks are also on the horizon, including any volatility around the midterm elections in November, as well as warnings signals out of the bond market.Correlation, after all, tends to be strongest when a sudden shock spurs investors to take risk off in tandem. “We’re in the late innings of the ball game,” Sosnick said. “Plus, quite frankly, we’re past the average median length of a bull market right now. So, add all this up, add in political risk from midterms. … I think it’s a little trickier than not, let’s put it that way.” Doing the homework But Lerner expects the bull market to remain intact, saying the current environment appears to reward active investing rather than passive indexing. Investors have gotten more selective within technology , the chief investment officer said. Software, which took a beating earlier this year, has more recently staged a comeback as traders reevaluated their business outlooks, and combed through the wreckage for survivors. Divisions in consumer discretionary stocks have similarly become more pronounced, a reflection perhaps of growing divergence in the economy between high- and low-income consumers. Lerner himself is choosing stocks with relatively cheap valuations, positive earnings momentum and strong price momentum. And, for those wary of tech-related volatility, the investment head suggested traders diversify into industrials, health care, financials and small caps with positive tailwinds. “Doing the actual extra homework on individual stocks actually can make a difference,” Lerner said.
