The dispersion in the U.S. equity market is persisting…

 The U.S. Presidential Election had been a primary catalyst for higher dispersion in the U.S. equity market. There was a widespread belief among investors that the newly elected administration would promote a set of economic policies that would ‘reflate’ the U.S. economy sooner than previously anticipated, as well as bring about regulatory changes that would benefit specific sectors of the economy. On the macroeconomic front, a swifter reflation of the economy would have had direct implications for the projected path of economic growth, as well as the projected monetary policy stance. Higher growth would gradually lead to higher inflation, and, as a consequence, to a new monetary regime, meaning a more accelerated path of monetary tightening.

Equity investors reacted to this expected change of the underlying macroeconomic and financial environment, or to the increasing probability of a regime shift, by positioning in stocks, sectors and styles that would most likely benefit under a new regime. To be more specific, the higher observed dispersion was a direct result of the increasing likelihood of a significant deviation from the norm of the last seven year period.

Using sector and style related data, this report provides evidence regarding the persistence of higher equity dispersion in the U.S. equity market, and puts recent market performance into perspective.