The lockstep moves in global stocks that dominated equity markets for the past six years are breaking down at the fastest rate on record, a sign investor confidence is finally returning from the financial crisis.
A measure of how much the 2,073 companies in the FTSE All-World Developed Index swing in unison has dropped 31 percent since June, the biggest retreat since at least 1993, according to data compiled by Societe Generale SA and Bloomberg. The indicator ended last month at the lowest level since 2007.
Equities are responding to earnings and merger speculation again after being pushed up and down by events from the credit freeze to Europe’s debt crisis to the stalemate in U.S. budget negotiations. Diminishing correlation was a buy signal in 1998 and 2003 and has coincided this year with the biggest January rally for the Standard & Poor’s 500 Index since 1997, according to data compiled by Bloomberg.
“If you are a good stock-picker or an event-driven picker, your added value is rewarded as opposed to all stocks going up or down the same way,” said Jose Gonzalez-Heres, who helps oversee $15 billion as a manager in the hedge-fund team for Morgan Stanley Alternative Investment Partners in West Conshohocken, Pa. “This is the first time we see a persistent trend of declining correlation.”
The reading, a measurement of how much returns in individual stocks are attributable to swings in the broader market, stood at 32.4 at the end of last month, down from 47.2 in June, according to Societe Generale in Paris. The drop was the biggest since the data started in 1993, indicating stocks are moving with greater independence.
The index reached a high of 49.6 in December 2011. A reading of 100 indicates shares are trading in lockstep.
The divergence in returns is prompting Morgan Stanley to send more money to managers who buy stocks based on profit growth and takeover odds, Gonzalez-Heres said. Bears say the improvement will be temporary as U.S. lawmakers confront March deadlines on spending plans and elections are held in Italy and Germany.
Weakening correlations are reducing daily swings in the S&P 500. The benchmark gauge for American equities has gained or lost an average of 0.42 percent per day in 2013, compared with 0.59 percent in 2012 and 1.74 percent during the credit crisis of 2008, data compiled by Bloomberg show. This year’s average matches the lowest annual level since 1993.
Loosening ties among shares mean company news is having a greater impact. DuPont Co., the biggest U.S. chemical maker by market value, climbed 1.8 percent on Jan. 22 after earnings exceeded projections.
That compares with Jan. 24, 2012, when the company lost as much as 1.2 percent even after releasing first-quarter earnings that topped estimates. The S&P 500 fell 0.1 percent that day on a report that showed sales of previously owned U.S. homes unexpectedly dropped.
Monsanto Co. rose 2.7 percent on Jan. 8 after reporting first-quarter results that were higher than analysts predicted. When the world’s largest seed company said in April that quarterly profit exceeded estimates and raised its full-year forecast, the stock slid 1.5 percent amid a 1 percent decline in the S&P 500 that followed a disappointing Spanish bond auction.
“A stock picker’s market is one where there’s real distinction between winners and losers,” said Jeffrey Davis, who oversees $5 billion as chief investment officer at Lee Munder Capital Group in Boston. “Investors are much more aggressive about individual equity selections now, rather than looking for top-down trends.”