It's no wonder that fund managers were already under fire by studies showing they don't earn their keep. A University of Maryland study of 2,076 funds over 32 years through 2006 found that actively managed funds lagged passive index funds by a risk-adjusted 0.97 percentage point a year, after accounting for those steep fees.
Then the stock market crashed and investors pulled money out of U.S. equity funds. What's more, the money that stayed in went more and more into indexes and ETFs. One sign of the times: A book touting passive investing that was co-written by a reformed Wall Streeter — "The Investment Answer" — just hit No. 2 in the "advice" category of the New York Times' best-sellers.
Now Wall Street is abuzz with news of falling "correlations." The term refers to how tightly prices and other financial measures move together. A recent report by ConvergEx's Colas shows a correlation between consumer staple stocks and the Standard & Poor's 500 index of 41 percent, which means they move together 41 percent of the time, down by half in one month. Other stocks that are moving to their own rhythm now: utilities, telecoms and energy.
Gold is going its own way, too. When investors buy gold, a sort of Armageddon currency, they usually sell stocks, and vice versa. But they've been buying and selling the two in tandem __ until recently. The correlation was 57 percent three months ago but has since plunged past zero. That means the two more often move in opposite directions now.
Some Wall Streeters are skeptical the synchronized dance is over. Most stocks still track the market nearly three-quarters of the time versus a two-third average since 1990. Mark Bronzo, a money manager at Security Global Investors, says correlations will remain high this year, too. "It's not just about fundamentals," he says.
Blood of Brown Brothers is more optimistic. He notes that it was only natural that stocks should move together given the "historical mindbenders" of late — the biggest downturn since the 1930s, a seizing up credit markets, a sovereign debt crisis and then a historic stock rally.
"A lot of weird things have been going on," Blood says. "But if extreme events diminish, then individual stories get more important."
As he spoke, TV screens were showing Egypt's Tahrir Square swarming with protesters above a news ticker flashing that an estimated 5,000 had been wounded.
"If we get a big oil shock or the Saudis have a revolution, correlations will go up," Colas says. And if that happens and you're a stock picker? "You throw up hands and walk away," he says.