So we are about halfway through Q1 2017 earnings, and the results are predictably mixed. Our friends at FlowPoint Capital have alerted us to some pretty interesting data that is starting to show up in their proprietary risk screens, namely that the market is shaping itself into a barbell, and return dispersion among stocks is getting wider.
According to FlowPoint’s model, only 40% all liquid U.S. stocks are currently in a category which historically generated positive returns, and the performance spread between sectors is pretty wide. For example, Consumer Discretionary as a category only shows 23% of its stocks with expected future positive performance, while Energy and Financials have the highest concentrations, at 63% and 59% respectively.
Currently, 54% of U.S. stocks are up year-to-date, and 46% are down. For long/short managers this is manna from heaven. Sector and pair-trade opportunities haven’t been this plentiful in years. For example, even though Financials are currently showing positive expected future performance, only 31% of Financial stocks are up year-to-date. Tech, in contrast, shows the opposite – 63% of Tech stocks are up year-to-date.
Some of the sub-sector dispersion opportunities are even more interesting (like payment processors versus consumer credit names), and we will have more on that in another post. But this data confirms trends that have been in evidence for quite some time – that market returns are being dominated by fewer and fewer large names. This is both an opportunity for investors and a cause for concern.
