Much has been made about soaring stock market correlations, and how they could be signalling a Black Monday-style crash.
However, RBC Capital’s U.S. equity strategy team thinks it would be a mistake to just throw up your hands and quit the stock market.
In a note titled Opportunity Exists despite High Correlation, RBC breaks down the Russell 1000.
They found that the top quintile (i.e. top 200 performing stocks) outperformed the bottom quintile by a staggering 38.4% since April 29.
The note identifies the key characteristics that separated the outperformers and the underperforms.
'We find, on average, that the performance leaders sourced 81% of their revenues from the domestic market versus 71% for those that have lagged.'
'The proportion of stocks with no yield in the best performing quintile was 29% versus 50% for the lagging group. In fact, the average yield in the former group was 2.0%, or three times higher than what was observed among the underperformers.'
'Year-ahead earnings forecasts at the start of the market downturn were 17% for the eventual performance leaders versus 24% for those who brought up the rear.'
'In fact, the implied return for the laggards was 12%, or three times larger than the embedded return expectations for the subsequent performance leaders.'
'We found that a typical stock in the group of Quintile 1 performers traded at a P/E of 21, or an 11% discount to the 23.7 times recorded for Quintile 5.'
'The top performing quintile of stocks (Quintile 1) has returned 0.3% over this timeframe while the bottom performing quintile (Quintile 5) is down by 38.1%. This is a huge performance spread, especially over such a short timeframe.'
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