It's a stock picker's market.
For 1 1/2 years, individual stocks moved with the broad market with little regard for the prospects of the companies behind them. Would they make big profits? Were they in industries that were shrinking or growing? Was the CEO a bumbling idiot? It didn't seem to matter.
But now some stocks are zigging while others are sagging, and knowing something about the companies, themselves, is important if you don't want to lose money.
"You can't shove all your chips on the roulette table anymore and expect to win," says Nicholas Colas, chief market strategist at BNY ConvergEx Group, a stock brokerage. "You have to watch your portfolio carefully."
Until a month ago, for instance, you could have bought all manner of consumer-products companies and made money. Stocks of companies that make soap and cereal and other staples rose in lockstep with stocks of makers of discretionary goods like jewelry and perfume and cigars. So far this year, though, stocks of the staple makers have barely budged while those of discretionary companies have risen 2.1 percent.
To some on Wall Street, the new disarray is welcome.
"When everything is up, it's frustrating," says Charles Blood, senior equity strategist at Brown Brothers Harriman. "You do all the work, you figure out what's better and worse, and there's no reward."
The folks who run stock funds pore over financial statements for hours, parse CEO comments like Kremlinologists, project profits down to the penny — and get paid a lot to do so.
But why pay them if the stocks they pick do no better than the broad market? The typical mutual fund that's actively managed by a pro charges $1 or so annually for every $100 invested. That might not seem like much until you consider that $100 stocks have gained $8 or $9 in value annually on average over the long run. Index or exchange-traded funds that passively mimic the market often cost 50 cents or less so you get to keep more of your money, and allow it to compound those returns each year.
It's no wonder that fund managers were already under fire by studies showing they don't earn their keep. A University of Maryland study of 2,076 funds over 32 years through 2006 found that actively managed funds lagged passive index funds by a risk-adjusted 0.97 percentage point a year, after accounting for those steep fees.
Then the stock market crashed and investors pulled money out of U.S. equity funds. What's more, the money that stayed in went more and more into indexes and ETFs. One sign of the times: A book touting passive investing that was co-written by a reformed Wall Streeter — "The Investment Answer" — just hit No. 2 in the "advice" category of the New York Times' best-sellers.
Now Wall Street is abuzz with news of falling "correlations." The term refers to how tightly prices and other financial measures move together. A recent report by ConvergEx's Colas shows a correlation between consumer staple stocks and the Standard & Poor's 500 index of 41 percent, which means they move together 41 percent of the time, down by half in one month. Other stocks that are moving to their own rhythm now: utilities, telecoms and energy.
Gold is going its own way, too. When investors buy gold, a sort of Armageddon currency, they usually sell stocks, and vice versa. But they've been buying and selling the two in tandem, until recently. The correlation was 57 percent three months ago but has since plunged past zero. That means the two more often move in opposite directions now.
Some Wall Streeters are skeptical the synchronized dance is over. Most stocks still track the market nearly three-quarters of the time versus a two-third average since 1990. Mark Bronzo, a money manager at Security Global Investors, says correlations will remain high this year, too. "It's not just about fundamentals," he says.
Blood of Brown Brothers is more optimistic. He notes that it was only natural that stocks should move together given the "historical mindbenders" of late — the biggest downturn since the 1930s, a seizing up credit markets, a sovereign debt crisis and then a historic stock rally.
"A lot of weird things have been going on," Blood says. "But if extreme events diminish, then individual stories get more important."
As he spoke, TV screens were showing Egypt's Tahrir Square swarming with protesters above a news ticker flashing that an estimated 5,000 had been wounded.
"If we get a big oil shock or the Saudis have a revolution, correlations will go up," Colas says. And if that happens and you're a stock picker? "You throw up hands and walk away," he says.
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