One way to view the risk profile of a group of companies is to measure the average standard deviation of price changes for that group. We do this for all the sectors and countries comprising the MSCI World Index. This idea is to see how the market is pricing risk across various constituent groups. High average standard deviation levels for a group of companies usually prevail during times of stress in the markets, and vice versa. However, we also notice varying risk profiles between groups of companies. For instance, the average standard deviation of companies in non-cyclical sectors tends to be much less than the average standard deviation of companies in cyclical sectors, which makes sense since earnings of companies in cyclical sectors are inherently more volatile.
While we have noticed the average standard deviation of price changes drop for all the sectors and countries we look at, we have also noticed that the average standard deviation for companies in cyclical sectors has fallen even more than the average for non-cyclical sectors. To us this implies that the market is pricing cyclicals as if the earnings carry the same volatility characteristics as non-cyclicals, which makes little sense to us. But, that is where we are right now.
In the first chart below we show the spread between the average 65-day standard deviation for companies in the Industrials sector and the Consumer Staples sector. We can see that the spread is at an all-time low as far back as we have data and is basically zero. The last two charts show the absolute level of the average standard deviations for the two sectors.