The ‘bottoms-up’ stock picker is dead

Published Wed, Mar 18 201510:51 AM EDT

Hug your economist. You're going to need him. As moves by the European Central Bank and the Federal Reserve dominate headlines, a study by Morgan Stanley found that nearly half of a stock's return is now explained by macroeconomic factors as opposed to stock-specific concerns. So forecasting where rates, the dollar and oil are headed has become just as important as predicting how much a specific company will earn this year. "They call themselves 'bottom-up stock pickers', or 'equity guys', or 'PMs'," wrote Adam Parker, chief equity strategist for the investment bank. "We used to hear people say 'we don't do any macro or strategy or quant', but thankfully to us anyway, that cacophony has become more muted." Four years ago, almost two-thirds of analysis was stock specific, according to the report. Today, just 53 percent is reliant on stock specific factors. "Overall growth, inflation and interest rates impact all stocks, while the earnings of a single company might change the outlook for a sector, but only rarely the entire market," said Steve Liesman, CNBC's senior economics reporter. "This tells you why buying index funds cheaply works as an investment strategy. You get all the macro essentially for free and don't overpay for the stock picker, who could be right or wrong." Read More Shh! What Yellen won't say and how to trade it While many people have said the increase in volatility will make stock picking more important, these figures argue that getting the 30,000 feet picture right will only grow in importance as the Fed moves to raise interest rates, oil finds a bottom (one day) and the ECB continues its quantitative easing program. And there's more data that support the death of the stock picker. Nicholas Colas of Convergex says that a typical sector in the market should have only a 50 percent correlation with the market. But his analysis last week shows that all 10 major sectors in the S & P 500 were in sync with the index have an 81 percent of the time. In February, it got as high as 84 percent. "I wouldn't want to be like you," Colas wrote in his note to clients. And one can't even go overseas for diversification purposes. Developed markets have an 86 percent correlation to the 30-day performance of the S & P 500, according to Colas. Emerging markets are 77 percent linked to the S & P 500. The money play: So if one must put on their macro cap to survive, what's the trade? On the dollar, Parker wrote: "Obviously the strong dollar doesn't have a uniformly negative impact on all businesses. Our work shows that consumer staples, machinery, chemicals, select technology, and select healthcare are most at risk, and we are not overweight any of these areas. Banks generally perform well when the dollar strengthens, all else equal." And given the rising dollar and potentially rising interest rates environment, the strategist likes consumer discretionary and energy stocks. Using the other half of his brain on stock specifics, Parker ran a screen of stocks with price-earnings ratios lower than the market. JPMorgan Chase and Goldman Sachs look like a value here from the financials. National Oilwell Varco and Transocean look attractive on that basis as well, according to Parker's note. Heweltt-Packard is a value stock from technology, according to his report.

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Hug your economist. You're going to need him.