Tobias Levkovich: Intra-stock Correlation Shows Low Investor Anxiety
Chief U.S. equity strategist at Citigroup Tobias Levkovich was on CNBC this morning providing his outlook for the stock market. He had several interesting observations indicating that while the fiscal cliff is “huge,” investors aren’t exhibiting significant anxiety regarding it.
Levkovich measures investor anxiety by looking at intra-stock correlation amongst the top 50 names in the S&P 500. “When they all trade the same it indicates there is enormous fear in the markets,” Levkovich said. He added that a month to six weeks ago intra-stock correlation had dropped to about 20 percent, meaning investors were complacent. Levkovich said we’re still only seeing 25 percent intra-stock correlation currently so investors aren’t trading stocks as if they’re “petrified” of the fiscal cliff.
Another indicator which has Levkovich concerned is the Citi Economic Surprise Index which is “toppy.” When the index is at the top end of its range stocks tend to have a problem, he added.
The interview continued with Levkovich discussing why investors should continue to hold stocks, the reason equity risk premiums are high, how the market is priced for zero growth from now through eternity and why there is a 90% chance stocks will be up 12 months from now, the worsening environment in Europe and areas which have cyclical exposure there, and the effect of higher tax rates on dividend stocks.
Back in September, Levkovich provided the reasoning behind his forecast for the S&P 500 reaching 1615 by the end of 2013 [link].