I went to a breakfast meeting this morning to hear the last thoughts on the financial world from Ned Davis Research (NDR).
I have mentioned NDR in previous reports. I like their research since it is based on huge amounts of data rather than "gut feel" or a close reading of the financial press. In addition, once NDR takes a position, they tend to be patient, and not suddenly shift from day-to-day.
There was lots of material, but let me give you a few highlights:
1. NDR remains bullish on stocks and bearish on the outlook for bonds. Their favorite global sectors are found in the emerging markets, where they like the combination of strong growth and attractive valuations;
2.That said, they expect sluggish economic growth. Unemployment, unfortunately, is expected to remain high for a number of years to come due to a number of factors (I have been posting on some of these in recent days);
3.They are also not optimistic on the outlook for housing, since house prices and unemployment rates are inversely correlated;
4. Although they are not excited about the outlook for bonds, they are not abandoning the sector. They noted that with yields so low, and investor desire for safety still high, bonds could continue to at least hold their value. They continue to like corporate bonds, but are less excited about mortgage-backed securities. NDR does not have any strong views on the yield curve, noting that only the 30-year sector seems to offer value albeit with considerably more principal risk;
5. Within the US equity markets, their favorite sectors are consumer staples; industrials; and materials. They remain underweight health care and telecommunications.
The most startling chart they showed concerned the extremely high correlation between all stock price movements that has occurred recently.
According to NDR's work, the median correlation of all stock returns is at an all-time record high: 0.82. Put another way, during the last few weeks, stock picking added no value - it was all about beta, or being in or out of the market.
Naturally this last point received some pushback from the attendees, most of whom pick stocks for client portfolios. Does this most period represent an anomaly, or is stock picking a dying art?
We'll have to see, I guess, but I think the world of opportunity for security analysis is definitely shrinking.
First, you have the widespread use of exchange-traded funds (ETFs), which offer investors immediate access to sectors of the markets. ETFs now represent nearly $1 trillion in assets.
Second is continuing presence of hedge funds. Despite some disappointing results recently, large pension and endowment funds continue to allocate money to this sector, and the funds tend to trade very large positions.
And, third, is the large presence of quantitative models which are able to pick up mispricings quickly and execute trades within seconds. If, for example, stock A and stock B always trade together, but one day stock B is lagging, the quant models will catch this quickly and move to put a paired trade on.
But I digress.
A good meeting with NDR. Hopefully their bullish stance is correct.