Correlations are high. Risk-on, risk-off drives the market as market players trade ETPs and baskets rather than individual stocks. Market players worry about policy, and whether it will be inflationary (bullish) or deflationary (bearish).
What an ugly time to be a value investor, and a long-term industry rotator. The time cycle has shrunk to tiny proportions relative to the likely life of the assets being traded.
But I take heart that it will not always be this way. As Ben Graham said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Eventually, for industries where the companies are worth a lot more than the current price, there will be buyouts. For industries where companies are worth less, there may be IPOs.
I believe that correlations will reduce from here. It may not be dramatic, but they will fall. Whenever there is a dominant paradigm for asset pricing, there are assets that get mispriced.
My expectation is that there are many companies earning money while trading at a discount to adjusted book that will be bought out by others.
There have already been a lot of buyouts in the last month or so. This shows that a lot of the companies are undervalued by the stock market.
The good thing is it is easy to find cheap stocks that should do well over the next couple of years (assuming no major disruption to the world economy).
Insurance, one you have discussed at length, has some incredibly cheap stocks that, I think, are just being dragged down by the banks. Hard to see how these aren’t great to buy here with a longer time horizon.
“What an ugly time to be a value investor…”
Strongly disagree with the “correlations are high” excuse. As bbarberayr points out, there are cheap stocks everywhere.
My favorite currently is NVO. Its beta to the S&P 500 is about 0.57 – hardly a “high” correlation. Yet it has an astounding history of high and sustained ROIC over several years. Opportunities like these abound. It is actually a great time to be a value investor.
I would consider NVO to be a growth stock. Don’t get me wrong, I like my stocks, especially now, but if you look at the past, traditional value has been doing poorly of late, and I think most would concur with that.
PS — beta and correlation are different, though related. You can have a low beta, and still have a high correlation. Correlation deals with the tightness of the relationship, whereas beta is the slope of the response.
Your points are well taken. However, I would respond in two ways:
1) The distinction between growth and value is subjective, and more importantly, unproductive, IMO. If I value a stock, and that value comes out to a substantial premium to its current price, then that stock has investment value (assuming I have reasonably modeled for future growth and risk). No additional insight is gleaned from categorizing prospective stocks as ‘growth’ or ‘value’. What matters is determining whether you’re looking at a great business at a great price.
2) I calculate NVO’s correlation coefficient w/ the S&P 500 to be 0.044. This suggests a very loose relationship, even more so than the relative absence of steepness (beta) that I provided earlier.
[...] Today’s macro environment is creating misvaluations. (Aleph Blog) [...]
Every time I start to feel discouraged that all of my stocks are getting creamed in sympathy with the highly correlated market, I try to remember the flipside: all of those stocks that I *don’t* own yet which are just getting larger and larger margins of safety. Of course you have to have uninvested cash available to take advantage of that…