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A rising tide may no longer be lifting all boats.
Volatility for the stock market as a whole has “collapsed” since last year’s election, but investors can still find ample returns in projecting how US policies will impact individual companies, according to Goldman Sachs.
Growing policy uncertainty stemming from the Trump administration will “create ‘winners’ and ‘losers’ and stock performance increasingly will be driven by idiosyncratic factors, such as sensitivity to wage inflation, margin pressures, and uses of cash,” David Kostin, the investment bank’s chief equity strategist, said.
The trend has already begun to take shape, with the correlation between individual stocks listed on the S&P 500 declining after the election of Donald Trump to the lowest level since 2000. Recent trading has been “increasingly driven by ‘micro factors’”, Mr Kostin said.
While single-stock volatility has also remained “somewhat low” the gap between that and index-level volatility has widened to the highest point since 2007, Mr Kostin noted.
The rising dispersion in performance marks a turn from the past few years, when the Federal Reserve’s stimulative monetary policies have been a boon to risk assets as a whole, providing a steady tailwind that has helped to lift the S&P 500 by 10 per cent a year on average since 2010.
Mr Kostin said the more stock-specific trading could be good news to active managers like mutual and hedge funds that have faced outflows as investors have chosen to park assets in less expensive passive funds that track indexes.
“Greater return dispersion does not ensure that all fund managers will outperform their benchmark but rather the investing environment is more conducive to generating alpha for skillful stock pickers,” Mr Kostin said, referring to returns that are in excess of overall market movements.