Comovement represents the absolute number of stocks in the S&P 500 which move on the same direction on any day (either up or down).
If half the stocks move up and half move down, comovement would equal zero. If 100% of the stocks move up, comovement would slightly exceed 500 (there are currently 505 stocks in the S&P 500).
Holding volatility relatively constant the rise of index funds has led to a marked increase in the comovement of stocks since the 1990s.
This along with volatility selling and illiquidity creates a market structure that has serious implications for investing.
This series is one of the better when it comes to understanding what has gone wrong for value investors.
The first looks into whether value is actually cheap.
“The evidence brings us full circle to Arnott’s observation that the problem with the Value Factor has not been the absolute performance of Value stocks. The problem has been shorting the Glamour stocks“.
The second, propose something very intriguing – “that looking through the lens of optionality reveals that the source of excess returns to factors are not a function of the securities themselves, but rather the rules of portfolio construction and the embedded optionality these rules create“
They plot the markets trailing P/E ratio against CPI inflation (right hand side) and the 10-year real treasury yield (left hand side).
The data is from 1948 to today and sourced from BofAML
As real-rates go negative or inflation falls multiples tend to be lower.
KKR analysis suggests there isn’t some funny data skewing results here.
What about today? at the current real 10-year yield of -1.5% and inflation rate of 2.3% (likely to fall) the 17.5x P/E ratio for the market (since increased) stands out as too high.
These types of equity strategy charts are good to hang on to.
