Despite the fact that individual companies, industries, and sectors have different fundamentals and outlooks, most of the time stocks trade as a group. How much the market is moving is usually the major driver of sector and even individual stock moves.

But this tight correlation between sectors, industry, and stocks has been completely broken since the presidential election. To our way of thinking, the “story” of the market is not best described by observing that the market is up 2%, but instead, is best understood by the two charts below.

This chart shows the performance of the various sectors making up the S&P 500. You can clearly see how after trading as a group prior to the election, in the days after the vote the performance of various sectors exploded in different directions with financial stocks ripping higher while consumer staple and utility stocks experienced what amounts to a mini-crash for these defensive (historically low volatility) segments of the market.

Source: @mulletHF

This dynamic is playing out among individual stocks, not just sectors. The chart below shows how “dispersion”, the difference between individual stock returns versus the market overall, has also exploded to levels not seen since 2009 during the financial crisis.

Source: Wall Street Journal

This sort of market behavior isn’t good or bad. The market cycles through times when individuals stocks and sectors trade mostly in line with the market vs periods when they post wildly different results. But in trying to make sense of market behavior, the returns of market averages are more relevant during times of tight correlation and low dispersion but they don’t tell the full story during times of low correlation and high dispersion.

We view the current market environment not as one of a gently rising market, but rather as a period of violent re-pricing of underlying sectors and individual companies. Given our strategy at Ensemble Capital of building focused portfolios of individual stocks without a mandate to own all sectors, we welcome periods when the market rightly or wrongly sends prices in all different directions.

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