Nonetheless, between a dovish Federal Reserve and headwinds to corporate earnings, Wall Street banks including Bank of America and Morgan Stanley are touting active bets as a ticket to outperformance.
The logic is simple: As stocks sway to their own tune, money managers have ample opportunity to boost exposures to securities that exceed the index return while underweighting the laggards.
Equity valuations in the U.S. coming into the year were more spread out than any time since the crisis era, according to Bank of America. Meanwhile, the degree to which European and American stocks swing together has tumbled after they moved almost in lockstep in October. Within Europe, traders expect the link between individual shares will fall to the lowest since at least 2011.
“We’d expect active managers to be able to outperform in this kind of environment as correlations fall relative to a period of suppression of volatility through monetary stimulus,” said Shoqat Bunglawala, head of the global portfolio solutions for EMEA and APAC at Goldman Sachs Asset Management.
In Europe, in particular, the valuation rift between the cheapest and priciest stocks has been widening to multi-year highs, a boon for relative-value hedge funds.
Another rationale for stock-picking right now: The market is particularly unforgiving this earnings season. According to Morgan Stanley, U.S. companies that miss profit expectations are underperforming peers with positive surprises by the most since 2017.
Idiosyncratic forces are in play, too. U.K. investors had better wager on individual equities as opposed to factors like quality as Brexit risks vex traditional revenue projections, according to Sanford C Bernstein Ltd.
Still, the call to active investing has rung hollow over the years -- and the expectation of outperformance in a weak market arguably runs counter to the historic norm. After all, there’s no divine reason why rotations spurred by shifting risk appetite or correlations should hurt passive investors in particular -- emerging-market ETFs and defensive developed strategies, for example, have seen bumper inflows of late.
Another big caveat: If price swings rise, it can ramp up correlations and hit stock pickers along the way. “It remains to be seen whether more volatile markets will be a boon for active managers and the historical evidence is fairly mixed in that regard," said Citigroup Inc. analyst Louis Odette.
This article was provided by Bloomberg News.