At various points over the last few years, market analysts and pundits have echoed the popular belief that the world of the stock market has fundamentally changed, causing stocks to move in a much more correlated fashion than they have historically. Mark Hulbert says they’re wrong, and says there’s plenty of evidence to back it up.
“Don’t believe it,” Hulbert says in a recent column for MarketWatch. “The trading environment has not changed. Superior stock picking remains as possible — and as valuable — as ever.”
Hulbert says that a statistical bias is part of the reason for the misguided belief that the stock market has fundamentally changed. “It turns out that increased market volatility more or less automatically leads to heightened estimates of stocks’ correlation — even when nothing has really changed,” he says, noting that academic researchers discovered this more than a decade ago. The other reason, he says, is that correlations always tend to be higher when the market is going down versus when it is going up. That’s also been known in academic circles for more than a decade, Hulbert says. So in the past few years, with volatility often elevated and big declines occurring more often than normal, correlation figures have naturally been higher because of those factors — not because of some fundamental market change.
“We’re in a highly interdependent world all the time,” Kristin Forbes, an MIT professor and one of the researchers who initially pointed out the statistical bias factor, told Hulbert. “We are just more aware of it during volatile periods and down markets.”