Tag Archives: correlation
Tech Tantrums
The past week has been turbulent for Big Tech, with disappointing reactions to earnings from Microsoft, Amazon and Alphabet, while Apple and Meta emerged relatively unscathed after announcing their results. Concerns about growing capital expenditures on AI1 among these giants have led to renewed bubble fears among market participants. In an environment characterized by such…
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Volatility, Correlation and Dispersion in the S&P 500 Top 20 Select Index
The S&P 500® Top 20 Select Index series launched in August 2024 and is designed to measure the capped market-capitalization-weighted performance of the largest 20 companies, by float market cap, in the S&P 500. Previous blogs introduced the S&P 500 Top 20 Select Indices, covering their construction, objectives and historical performance. This installment examines the…
- Categories Equities
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- Equities
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Opportunity to Outperform
It’s been a challenging year for U.S. equities as investors adjust to a new rising rate regime, with inflation concerns at the forefront, coupled with uncertainty around future economic growth. Market commentators have argued that this environment is ideal for stock pickers to shine. This argument is correct, but with a caveat. With the S&P…
- Categories Equities, S&P 500 & DJIA
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Kensho Correlations
The Wall Street Journal reported that many active managers struggled to outperform the market in 2021. This underperformance is not surprising, as we observed less than ideal prospects last year for active management both in the U.S. and globally. Dispersion and correlation provide convenient lenses through which to analyze stock selection conditions. All else equal,…
No Safe Harbor for Stockpickers
We can use volatility and its components dispersion and correlation to analyze stock selection conditions globally. Most active managers run less diversified, more volatile portfolios than their index counterparts. Active managers should prefer above-average dispersion because stock selection skill is worth more when dispersion is high. The role of correlation is more subtle. While counterintuitive,…
- Categories Equities, S&P 500 & DJIA
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Headwinds on the Active Horizon
Active managers’ performance was disappointing in 2020, despite the market’s heightened volatility. As the market continues to march upward in 2021, it’s natural to wonder if current conditions are favorable for stock pickers. We expect active managers’ difficulties to persist. We can think of volatility in terms of its components: dispersion and correlation. Active managers…
- Categories S&P 500 & DJIA
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Opportunity Does Not Equal Attainment
We’ve previously argued that most managers should prefer above-average correlation, because the incremental volatility a manager accepts to pursue an active strategy will be lower when correlations are high. In addition, active managers should prefer above-average dispersion, because stock selection skill is worth more when dispersion is high. Both correlation and dispersion rose in 2020….
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A Conundrum in a Different Key
Volatility, dispersion, and correlation are elements of what we’ve elsewhere characterized as The Active Manager’s Conundrum. Active managers should prefer: Low volatility, which is typically associated with higher returns High dispersion, which means a larger payoff for correct stock selections High correlation, which reduces the opportunity cost of a concentrated portfolio The conundrum arises because…
- Categories S&P 500 & DJIA, Strategy, Thematics
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- S&P 500 & DJIA, Strategy, Thematics
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Making Sense of the Active Manager’s Conundrum
Why are the market environments most conducive to generating positive absolute returns the least conducive to producing positive relative returns? Explore the active manager’s conundrum with S&P DJI’s Craig Lazzara and Anu Ganti.
Coronaviral Correlations
Mea culpa: Roughly a month ago I used a dispersion-correlation map to describe how index dynamics can illuminate market movements. In particular, I reported that since high dispersion seems to be a necessary condition for a bear market, and S&P 500 dispersion levels at the end of February were far below those prevailing in past…
- Categories Equities, S&P 500 & DJIA
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