The Market Seems to Be Favoring Stock Pickers Again

Several key indicators have bolstered our confidence in the outlook for equities, as my colleague Kevin Simms explained in an article first published on Institutional

Turbulence Eases

The unholy trinity of turbulence—volatility, risk aversion and correlation—looks like it’s starting to ease significantly. Of course, markets are still nervous and there are risks on the horizon, but I’m encouraged to see three gauges of market stress coming down after four tough years.

First, volatility: The Chicago Board Options Exchange’s Volatility Index (VIX) dropped 33% from the end of 2011, to 15.64 as of March 12. That’s 25% lower than its four-year average.

Second, our own Global Risk Aversion Indicator has come down from stubbornly high levels, as one of the displays below shows. This index combines the implied volatility of equities, currencies, commodities and bonds with credit spreads and mutual fund flows, and can be a good harbinger of changes in risk appetite. Even after dropping 44% in the first two months of the year, it remains well above its long-term average. I think it still has a long way to go.

Market Conditions Have Improved Dramatically Last but not least, the pairwise correlation of individual stocks has taken a dive since the beginning of the year, as the second display shows. That is, stocks no longer tend to trade overwhelmingly in the same direction.

Declining correlations within the equities market are especially important for active managers. Since the global financial crisis began in late 2008, correlations have been extraordinarily high as investors, gripped with fear, have paid little attention to stock-specific attributes. As I’ve explained in previous posts, declining correlations suggest that investors are beginning to discriminate between stocks. We believe that this is a key ingredient to the success of research-driven investment strategies. Taken together, the recent trends of these three indicators suggest that market conditions for stock pickers are more promising than they’ve been for a long time.

What’s behind this shift? The biggest fundamental change in recent months is the European Central Bank’s resolute actions to support the euro area’s banking system with €1.1 trillion in loans since December. These moves have been crucial to convincing investors that the worst-case scenario of a systemic financial failure is not in the cards. Improving data on jobs and consumer spending in the US have also boosted investor confidence.

Of course, there are risks to the current equity rally. Perhaps the most potent threat comes from the Middle East, where the possibility of war between Israel and Iran is already putting pressure on oil prices. In my next post, I’ll present some research that we’ve been doing on the potential impact of a spike in oil prices on the markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices, any securities or financial products. This report is not approved, reviewed or produced by MSCI.

Sharon E. Fay, CFA

Head and Chief Investment Officer—Equities
Sharon E. Fay was named Head and Chief Investment Officer of Equities in July 2010. She is responsible for overseeing AB’s portfolio management and research activities relating to all equity investment portfolios. Previously, Fay served as CIO of Global Value Equities from 2003 to 2014. From 1999 to 2006, she was CIO of European and UK Value Equities, serving as co-CIO from 2003 to 2006 after being named CIO of Global Value Equities in 2003. From 1997 to 1999, Fay was CIO of Canadian Value Equities. Prior to that, she had been a senior portfolio manager of International Value Equities since 1995. Fay joined the firm in 1990 as a research analyst, subsequently launching Canadian Value, the firm’s first single-market service focused outside the US. She then went on to launch the company’s UK and European Equity services and build Bernstein’s London office, home of its first portfolio management and research team based outside the US. Fay holds a BA from Brown University and an MBA from Harvard Business School. She is a CFA charterholder. Location: New York

Kevin F. Simms

Chief Investment Officer—Global/International Value Equities
Kevin F. Simms, an AB Partner, was appointed Chief Investment Officer of Global and International Value Equities and chairman of the Global Investment Policy Group in July 2014. He has held the position of Chief Investment Officer of International Value Equities since 2012, after having served as co-CIO since 2003. He was also the Global Director of Value Research from 2000 to 2012. During his tenure as chief investment officer and research director, Simms has been instrumental in implementing significant enhancements to the firm’s cross-border research process. From 1998 to 2000, he served as director of research for Emerging Markets Value Equities. Simms joined the firm in 1992 as a research analyst, and his industry coverage over the next six years included financial services, telecom and utilities. Prior to that, he was a certified public accountant with Price Waterhouse. Simms earned a BSBA from Georgetown University and an MBA from Harvard Business School. Location: New York

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