This week’s chart of the week highlights the recent change in correlation between the stocks that comprise the S&P 500 as measured by the CBOE S&P 500 Implied Correlation Index. On November 18, 2016 correlation among stocks fell to a post-recessionary low of 26.5 compared to an average reading of 59.8.1 A lower measure signals to investors that sectors and styles in the S&P 500 have started to move independently after years of volatility and tighter correlation. This environment should allow active managers to generate alpha, as stock selection plays a key role in outperformance. As this trend continues, managers can focus on bottom-up fundamentals (i.e., company valuations) and less on macro-economic events that could cause dispersion within the asset class. For active managers, dispersion is critical because it allows them more opportunity to select winners and losers and thus outperform the indices against which they are measured. For investors with large allocations to actively managed U.S. equity portfolios, this is good news heading into the New Year.
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