US uncertainty offers opportunities, says Goldman

A rising tide may no longer be lifting all boats. Volatility for the US stock market as a whole has fallen since November’s election, but investors can still find ample returns in projecting how the policies of the new administration will impact individual companies, according to Goldman Sachs.

Policy uncertainty stemming from the Trump administration will “create ‘winners’ and ‘losers’ and stock performance increasingly will be driven by idiosyncratic factors, such as sensitivity to wage inflation, margin pressures, and uses of cash,” according to David Kostin, the investment bank’s chief equity strategist.

The trend has already begun to take shape, with the correlation between individual stocks listed on the S&P 500 declining after the election of Donald Trump to the lowest level since 2000. Recent trading has been “increasingly driven by ‘micro factors’”, said Mr Kostin.

Mr Kostin reckons that the dispersion in returns between stocks will accelerate this year as investors make sense of the policies that are ushered in by Mr Trump and a Republican-controlled Congress.

“We expect uncertainty to remain elevated throughout much of 2017, as President Trump’s key policy initiatives become crystallised and the impacts of the new administration are fully processed by the market,” he said.

Rising dispersion comes during a period that has been marked by historically low volatility for the S&P 500 index, which has charted a steady course to record highs since the start of the year.

The Vix index, a measure that tracks the options market to determine expected S&P 500 volatility over the next month, sat at 11.64 on Tuesday — far below the average of 19.63 since 1990.

Single-stock volatility has also remained “somewhat low”, but the gap between that and index-level volatility has widened to the highest point since 2007, Mr Kostin noted.

If a rising dispersion in performance between stocks unfolds it will mark a departure from the past few years, when the Federal Reserve’s stimulative monetary policies have been a boon to risk assets as a whole, providing a consistent tailwind that has helped to raise the S&P 500 by 10 per cent a year on average since 2010.

Mr Kostin said the more stock-specific trading could be good news to active managers like mutual and hedge funds that have faced outflows as investors have chosen to park assets in less expensive passive funds that track indexes.

“Greater return dispersion does not ensure that all fund managers will outperform their benchmark but rather the investing environment is more conducive to generating alpha for skilful stock pickers,” said Mr Kostin, referring to returns that are in excess of overall market movements.

US stocks were in the black on Tuesday as Wall Street reopened after a long weekend. The S&P 500 climbed 0.6 per cent to 2,364.4, the Dow Jones Industrial Average was up 0.5 per cent to 20,739 and the Nasdaq Composite advanced 0.4 per cent to 5,860.2. The small-cap Russell 2000 rallied 0.7 per cent to 1,409.

All four equity barometers were trading above their all-time closing highs. The 11 major S&P 500 sectors climbed higher, with energy, consumer staples and consumer discretionary stocks leading the way.