A version of this article was originally published on TKer.co.
A few charts I saw recently had me thinking about the challenge of trading individual stocks to generate above-average returns.
The first chart came from Citadel’s Scott Rubner.
It shows the correlations among S&P 500 stocks, basically the degree to which stocks move together. A high correlation suggests stocks are largely moving in tandem, whereas a low correlation means they are moving independently.
Rubner’s data shows that correlations have fallen to their lowest level in at least 15 years.
(Source: Citadel)
Because low correlation means stocks are diverging from the S&P 500 average, this implies there are more opportunities to trade individual stocks in ways that outperform the market. Therefore, it’s a “stock picker’s market.”
But just because there may be more ways to beat the market doesn’t mean it’s easier to do so.
In these low-correlation markets, you can just as well be overweight stocks that underperform the S&P while being underweight stocks that outperform. Either move would have you doing worse than the market average.
Fundstrat’s Hardika Singh recently highlighted some of the S&P’s big outperformers and underperformers behind a relatively modest move in the market averages over the past few weeks. From her Friday note:
Since memory and storage stocks peaked on June 22, the S&P 500 has gained close to 1%. But moves within single stocks have been much more volatile. Micron shares are down 18% over that period, Sandisk has fallen 18%, and Intel has tumbled 20%. Concerns that Big Tech has overbuilt AI infrastructure have dragged down highflying semiconductor stocks.
The reason why the index hasn’t been hurt by that is that those big declines have been canceled out by even bigger gains from other sectors of the market like financials, industrials, and healthcare. For example, Moderna’s stock is up 29%, while Axon Enterprise has added 42% since June 22.
Again, getting these trades wrong means underperforming the market, potentially by a wide margin.
To be fair, many folks are successful at trading such that they outperform the market. But most fail to do so.
Lower stock correlations don’t appear to be correlated with active manager outperformance
Notice in Rubner’s chart that correlations have mostly trended lower over the past 15 years. If lower correlations meant it was becoming easier to trade individual stocks, you would think more actively managed equity funds would be outperforming the market.
