It's a stock pickers market
The Sandbox Daily (2.20.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
stock lovers go fishing
Let’s dig in.
Blake
Markets in review
EQUITIES: S&P 500 -0.43% | Nasdaq 100 -0.48% | Russell 2000 -0.91% | Dow -1.01%
FIXED INCOME: Barclays Agg Bond +0.15% | High Yield +0.06% | 2yr UST 4.272% | 10yr UST 4.507%
COMMODITIES: Brent Crude +0.60% to $76.50/barrel. Gold +0.56% to $2,952.5/oz.
BITCOIN: +1.81% to $98,420
US DOLLAR INDEX: -0.04% to 106.334
CBOE TOTAL PUT/CALL RATIO: 0.89
VIX: +2.55% to 15.66
Quote of the day
“Great things are not done by impulse, but by a series of small things brought together.”
- Vincent Van Gogh
Stock picker’s market
Stock correlations are exceptionally low right now – hovering around the low end of its longer-term range – and allow for a broad set of opportunities as the stock market is now trading like a market of stocks.
When stock correlations are this low – such as the current environment – we see a healthy dispersion of returns all across the board. This is the dream for stock pickers.
Correlation measures how closely two variables track each other. The range is +1.0 (perfectly positive statistical relationship) to 0.0 (no relationship) to -1.0 (perfect negative relationship).
Individual stocks are increasingly going their own way these days, which gives way to growing divergences between the market’s winners and losers.
At the top end of S&P 500 returns, the best performer in 2025 is Super Micro Computer Inc. (SMCI) returning +97% year-to-date, while CVS Health Corp (CVS) and Palantir Technologies (PLTR) are up +49% and +48% respectively.
On the other end, the biggest dogs this year are -38% for West Pharmaceutical Services (WST) and -33% for Edison International (EIX).
The average stock is up +4.47%, while the index itself is up +4.01%.
Under this environment, some active managers will produce outsized returns based on their security selection prowess. It also means that other less fortunate managers will massively underperform benchmarks as stock selection weighs on their performance.
Stock picking is a hard business, if you hadn’t heard.
High return dispersion and low stock correlations reflect an environment where returns continue to be driven by micro, rather than macro, factors.
In a micro-driven market, a high share of the typical stock’s return is explained by company-specific factors.
In a macro-driven market, the returns for a typical stock are primarily explained by factors such as beta, sector, size, and valuation.
Over the last year or so, the market has remained more micro-driven than average.
Falling correlations, a wide range of returns, and company-specific drivers are all common behaviors of mid-cycle markets, which helps explain why index-level volatility has remained so low amidst the growing headwinds facing markets early in 2025.
Aside from early- and late-cycle periods – short timeframes that bracket a recession – company and sector fundamentals ebb and flow based on industry and business dynamics. That is what’s happening now.
As a result, sector and stock correlations versus the market are low. This translates into small index-level price moves on most days, which is exactly what we’re seeing now.
Sources: Ned Davis Research, Goldman Sachs Global Investment Research
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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"Stock picking is a hard business, if you hadn’t heard."
I'd go as far as to say it's a fool's game. https://blog.inverteum.com/p/individual-stocks-fools-game