10 months ago • 1 min
Stocks have become less macro-driven and more micro-driven in recent months. In fact, stocks are now 53% driven by individual stock (or micro) factors (blue line), close to their historical average of 56% (gray dotted line).
In a more micro-influenced market, a higher share of a stock’s returns can be explained by company-specific factors. But in a macro-driven market, returns for a stock are mostly explained by sector, size, valuation, and beta (i.e. how an individual stock moves when the overall stock market increases or decreases).
In markets like these, stocks don’t tend to rise and fall as a group and their prices tend to be more volatile. In other words, they have a higher return dispersion, (measured as two times the standard deviation of stocks’ trailing returns). The measure has risen to 29%, up from 22% six months ago. A more micro-driven market and rising return dispersion create more stock-picking opportunities for portfolios that are actively managed. It’s no surprise then that 43% of large-cap mutual funds have outperformed their benchmarks this year, more than the long-term annual average of 36%. Bank of America is calling it “the best stock pickers’ market in our careers”.
Goldman is forecasting that the S&P 500 will end the year roughly flat. This means buying an index ETF is unlikely to generate returns, so you might want to look at specific stocks instead if you want to juice up your portfolio. The best opportunities, Goldman says, are in the consumer discretionary and communication services sectors. You might also consider giving a good stock-picking fund a shot with some of your money.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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