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While it may seem like central banks, geopolitics and other macro factors are driving market performance, Morgan Stanley says price action tells a different story.
“For all the sound and fury coming from the macro, 2024 remains an unusually micro market,” strategist Andrew Sheets wrote in a note.
And the dispersion seen in single stocks is ideal for stock picking, Sheets said.
Morgan Stanley’s Prime Brokerage Strategic Content Group says 1Q24 was the “best first quarter for equity long-short alpha since 2010 (when the data began). Even more notable, that alpha is coming from both longs and shorts, across the US, Europe and Asia. It’s dispersion in action.”
“We think that a reasonable definition of a ‘macro-driven’ market is one with high correlation, where lots of assets are following the same macro-driven measures like oil (CL1:COM) (CO1:COM), interest rates or policy expectations,” Sheets said.
“Indeed, these issues make it seem almost self-evident that 2024 is a year where macro forces are in the driver’s seat. But with a slight exaggeration, and to paraphrase the old economics joke, there’s just one problem: this ‘macro volatility’ is showing up everywhere but the data.”
“Year to date, US 10-year yields (US10Y) (TLT) (TBT) have risen by about 80bp,” Sheets noted. “Over the same period, global equities are up 5% and investment grade (LQD), high yield (HYG) (JNK) and emerging market spreads are tighter.”
“Stocks and credit are moving more with the ‘macro’ on a day-to-day basis,” he added. “But 2024 is clearly showing that other forces are at work.”
“The average correlation between individual stocks is historically low. In credit, the basis between CCC and B rated spreads is unusually wide, even as overall spreads have tightened. Cross-asset, US REITs (XLRE) are the worst-performing GICS sector year to date, down 6%, while CMBX BBB-, a traded proxy for some of the most volatile debt in commercial real estate securitizations, is higher.”
“That’s the opposite of the high-correlation world you’d expect if macro factors were in the driver’s seat,” Sheets said. “Under the surface, this market is a micro machine.”
“This dispersion has practical implications. For active investors, an ideal stock-picking environment is one with enough dispersion to create opportunity, but not so much volatility that it’s difficult to take risk. This seems like a fitting description of the current backdrop.”
