A number of brokers have pointed out in their yearend reviews of the US stock market that stocks were unusually highly correlated with one another last year. What does this mean?
Think of a stock as an abstract thing, as a bundle of different economic attributes or characteristics that you get when you buy it. Some of these attributes–like that you get an ownership interest in a corporation that aims to make continually growing profits–are common to all stocks. Others–that the underlying company you own an equity interest in makes yoga pants, mines gold, or sells online advertising, and grows faster/slower than most–are specific to that stock.
The “highly correlated” observation means that, much more than usual, what counted in 2013 was the fact the thing you own is a stock; its individual characteristics didn’t make much difference. Check out my Keeping Score for December 2013 to see how closely aligned the performance of various industry groups was last year.
Note how clustered together the various sectors are around the S&P. In simple terms, an investor got +30% just for owning the S&P 500. He got an extra 8 percentage points for selecting Healthcare, and he lost 7 if he picked Energy. But neither decision meant anything close to as much as just being in stocks.
Yes, there were two truly poisonous sectors, Telecom and Utilities, which just barely made it into the plus column for 2013. These two sectors together make up only about 5% of the S&P, however. So from a statistician’s point of view, they’re irrelevant. That’s cold comfort for someone who bet the farm on either sector last year, although I think you’ve got to admit that being absent from 95% of the market is an extremely risky thing to do.
Tomorrow: why is the 2013 outcome is strange.