The "Great Rotation"

Much has been written about how money will move into stocks as long-term rates rise and bond prices and funds sink.  And indeed since rates began to rise in May bonds have fallen and stocks have surged to record highs.  But the facts don't confirm the "great rotation" from bonds to stocks.

Money is pouring out of bonds.  In August investors withdrew $6.7 billion from bond ETFs.  That's nearly 3 percent of the assets in those funds.  Investors sold bond funds as well.  The world's biggest fund, Pimco Total Return, had $7.7 billion in net outflows in August and has lost 14 percent of its assets in the last four months.

But data show that most of the money coming out of bond funds has not gone into stocks.  In August, investors pulled more than $15 billion out of U.S. stock ETFs.  The largest ETF, SPDR Standard & Poor's 500, had the most withdrawals as the market fell.  Although stocks are having an exceptional year, last month investors feared an end to the stimulus program and military strikes in Syria.  That was a bad move.  Stocks rose 4 percent in the first half of September, and retail investors continue to underestimate this powerful bull market.

My belief for the past year or two, well before talk began of a rotation out of bonds, has been that investors searching for income will turn to stocks for lack of an alternative.  The acronym TINA says it all:  "There Is No Alternative."  That is every bit as rue today as it was last year and the year before.  Until short-term rates rise significantly, or for that matter rise at all, stocks will do well.  The bull market will continue with occasional, mild and very brief pullbacks.

Wharton Professor Jeremy Siegel said that if the economy grows, so will earnings and that would be good for stocks.  If the economy limps along or falters, rates would stay low for a longer time and that would also be good for stocks, which would be even more compelling buys compared to the alternatives.  A win-win situation, he says.  I agree.

David Vomund
www.ETFportfolios.net

Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.