Hardly an hour goes by without hearing some guy on TV — often a mutual fund manager — extolling the benefits of a diverse stock portfolio, proudly claiming that it’s a “stock picker’s market.”
Of course, the guy will never say otherwise. He’ll never say it’s a good time to be blindfolded, throwing darts.
But at least during this rally, you might as well have been throwing darts.
In a note about the difficulty of engaging in quantitative strategies (market neutral — some longs, some), Matt Rothman said the following:
…the average systemic correlation across stocks is at near all times highs, exceeded only by the days following the October 1987 crash and a brief period in 1954. We measure this “implied correlation” as the correlation among a portfolio of stocks, where we assume the correlation is constant for each pair of stocks. In other words, implied correlations are the values one gets from doing portfolio maths and ascertaining what the dispersion is among stocks within that grouping. A high correlation means that there is very little dispersion among the stocks and a low correlation means that there is high dispersion in performance. Today there is very little dispersion when measured in stocks across the market as a whole. Systemic factors are driving stock returns across the market. Stock specific news is largely irrelevant and that this is the case in the middle of earnings season, when stock specific news should be at its height, is truly remarkable. Getting the individual names right in the portfolio has never been less important. Getting your systematic risk exposures (e.g. your style tilt) correct has never been more important.