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Dispersion Is the Great Alpha Generator

16 June 2020

This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA regulations).

By Brad Neuman, CFA Senior Vice President Director of Market Strategy

When we listen to the TV or read on the internet about the economy, it is almost always in aggregate terms. Here are some recent headlines:

America’s Awful Economy In The First Quarter Was Even Worse Than We Thought (CNN)

For Economy, Worst of Coronavirus Shutdowns May Be Over (Wall Street Journal)

Good Economic News is Coming and That’s Bad (Bloomberg)

But the economy isn’t one entity moving in one direction at any given time. It comprises many different businesses in various industries that are experiencing divergent trends. In other words, it has winners and losers.

Can there really be winners in a catastrophic environment like the coronavirus pandemic with soaring unemployment and precipitously declining spending?  Yes, there are companies bursting at the seams with growth, companies that cannot hire fast enough and  cannot keep up with their orders.

Hiring Amidst Mass Layoffs?
Everyone knows the economic picture has been atrocious this year with over 20 million jobs lost, according to the Bureau of Labor Statistics.i But just as the aggregate economy sheds jobs, some companies are hiring. Over 2 million jobs have been lost in the retail industry but WalMart plans to hire 150,000 individuals, Amazon 100,000, and Lowe’s 30,000.ii The transportation industry lost nearly a million jobs but Instacart plans to hire several hundred thousand employees.iii This is part of the reallocation of resources in the economy as e-commerce and big box retail share gains accelerate. However, research suggests that the biggest driver of dispersion is not industry exposure but idiosyncratic or firm-specific factors. For example, in the restaurant industry hundreds of thousands of restaurants are under financial duress while stronger restaurants, like Wingstop, have been able to achieve double-digit same-store sales growth during the pandemic.
There is a way to quantify the changing fortunes and churn within the economy—the so-called job reallocation rate measures the shifting employment opportunities across firms.iv The statistic looks at the sum of expected job gains at companies that expect to hire plus job losses at companies that expect to fire, relative to aggregate employment. The higher the number is, the more reallocation of human resources exists. In the current economic environment, the job reallocation rate is the highest it has been in years as the dynamic U.S. economy shifts jobs to those sectors and companies benefitting from demand trends, and takes jobs away from business models that may be failing (see figure 1)

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