Finally, dispersion – which is a measure of investment opportunity — remains low. Unlike correlation, which measures whether assets go up and down at the same time, dispersion reflects the degree of difference between the best and the worst performers. In a high dispersion environment, there’s a large gap between the “best” stocks and the “worst” stocks; when dispersion is low, the gap is small. In 2013, dispersion in the U.S. market — despite falling correlations — was at its all-time low:
Although dispersion ticked up modestly at the begining of 2014, it’s still well below its historical average level. This doesn’t mean that a skillful (or luckly) manager will be less skillful (or lucky) than he would otherwise be. Dispersion says nothing about the level of a manager’s skill, but it signifies something important about the value of that manager’s skill. The fact that today’s dispersion levels are quite llow implies that the rewards to successful stock picking are likely to be small by historical standards.
Which does not sound like a “stock-picker’s market” to me.
This article was written by Craig Lazzara, Global Head of Index Investment Strategy, S&P Dow Jones Indices.
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