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Crocs is among the stocks that historically have been the most sensitive to changes in marketwide liquidity.
Jamie McCarthy/Getty Images
It’s possible to identify stocks with good odds of outperforming the market averages in the next bull market.
They are those that are particularly sensitive to changes in the stock market’s overall liquidity—which refers to how easily shares of an asset can be bought or sold without substantially affecting their price. Researchers have found that, while such stocks perform very poorly when marketwide liquidity shrinks, they handily beat the market when liquidity is abundant. Liquidity typically returns in a big way when a new bull market begins.
By focusing on these liquidity-sensitive stocks, Barron’s isn’t declaring that a new bull market has begun. Nor is it predicting when a new one will begin. But it’s not too early to start constructing a buy list of possible candidates for when you want to pull the trigger.
In fact, the more adventuresome among you may choose not to wait for a new bull market to do so. Stocks that are sensitive to changes in marketwide liquidity should also perform well during any strong rally—even if it ultimately proves to be a bear-market rally.
The researchers who discovered stocks’ sensitivity to liquidity are Ľuboš Pástor of the University of Chicago’s Booth School of Business and Robert Stambaugh of the University of Pennsylvania’s Wharton School. Their study, entitled “Liquidity Risk and Expected Stock Returns,” was published in the Journal of Political Economy in 2003. This liquidity effect over the past 20 years has been just as strong as what was documented in their…
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