By Edward Krudy
NEW YORK Feb 3 Wall Street's current jubilant
narrative is that a rush into stocks by small investors has
sparked a "great rotation" out of bonds and into equities that
will power the bull market to new heights.
That sounds good, but there is a snag: The evidence for this
is a few weeks of bullish fund flows that are hardly unusual for
Late-stage bull markets are typically marked by an influx of
small investors coming late to the party - such as when your
waiter starts giving you stock tips. For that to happen you need
a good story. The "great rotation," with its monumental tone, is
the perfect narrative to make you feel like you're missing out.
Even if something approaching a "great rotation" has begun,
it is not necessarily bullish for markets. Those who think they
are early to the party may actually be arriving late.
Investors pumped $20.7 billion into stocks in the first four
weeks of the year, the strongest four-week run since April 2000,
according to Lipper. But that pales in comparison with the $410
billion yanked from those funds since the start of 2008.
"I'm not sure you want to take a couple of weeks and
extrapolate it into whatever trend you want," said Tobias
Levkovich, chief U.S. equity strategist at Citigroup. "We have
had instances where equity flows have picked up in the last two,
three, four years when markets have picked up. They've generally
not been signals of a continuation of that trend."
The S&P 500 rose 5 percent in January, its best month since
October 2011 and its best January since 1997, driving
speculation that retail investors were flooding back into the
Heading into another busy week of earnings, the equity
market is knocking on the door of all-time highs due to positive
sentiment in stocks, and that cannot be ignored entirely. The
Standard & Poor's 500 Index ended the week about 4
percent from an all-time high touched in October 2007.
This week will bring results from insurers Allstate
and The Hartford, as well as from Walt Disney,
Coca-Cola Enterprises and Visa.
But a comparison of flows in January, a seasonal strong
month for the stock market, shows that this January, while
strong, is not that unusual. In January 2011, investors moved
$23.9 billion into stock funds and $28.6 billion in 2006, but
neither foreshadowed massive inflows the rest of that year.
Furthermore, in 2006 the market gained more than 13 percent
while in 2011 it was flat.
Strong inflows in January can occur for a number of reasons.
There were a lot of special dividends issued in December that
need reinvesting, and some of the funds raised in December
tax-selling also find their way back into the market.
During the height of the tech bubble in 2000, when retail
investors were really embracing stocks, a staggering $42.7
billion flowed into equities in January of that year, double the
amount that flowed in this January. That didn't end well, as
stocks peaked in March of that year before dropping over the
next two-plus years.
MOM AND POP STILL WARY
Arguing against a "great rotation" is not necessarily a
bearish argument against stocks. The stock market has done well
since the crisis. Despite the huge outflows, the S&P 500 has
risen more than 120 percent since March 2009 on a slowly
improving economy and corporate earnings.
This earnings season, a majority of S&P 500 companies are
beating earnings forecast. That's also the case for revenue,
which is a departure from the previous two reporting periods
where less than 50 percent of companies beat revenue
expectations, according to Thomson Reuters data.
Meanwhile, those on the front lines say mom and pop
investors are still wary of equities after the financial crisis.
"A lot of people I talk to are very reluctant to make an
emotional commitment to the stock market and regardless of
income activity in January, I think that's still the case," said
David Joy, chief market strategist at Columbia Management
Advisors in Boston, where he helps oversee $571 billion.
Joy, speaking from a conference in Phoenix, says most of the
people asking him about the "great rotation" are fund management
industry insiders who are interested in the extra business a
flood of stock investors would bring.
He also pointed out that flows into bond funds were positive
in the month of January, hardly an indication of a rotation.
Citi's Levkovich also argues that bond investors are
unlikely to give up a 30-year rally in bonds so quickly. He said
stocks only began to see consistent outflows 26 months after the
tech bubble burst in March 2000. By that reading it could be
another year before a serious rotation begins.
On top of that, substantial flows continue to make their way
into bonds, even if it isn't low-yielding government debt.
January 2013 was the second best January on record for the
issuance of U.S high-grade debt, with $111.725 billion issued
during the month, according to International Finance Review.
Bill Gross, who runs the $285 billion Pimco Total Return
Fund, the world's largest bond fund, commented on Twitter on
Thursday that "January flows at Pimco show few signs of
bond/stock rotation," adding that cash and money markets may be
the source of inflows into stocks.
Indeed, the evidence suggests some of the money that went
into stock funds in January came from money markets after a
period in December when investors, worried about the budget
uncertainty in Washington, started parking money in late 2012.
Data from iMoneyNet shows investors placed $123 billion in
money market funds in the last two months of the year. In two
weeks in January, investors withdrew $31.45 billion of that, the
most since March 2012. But later in the month money actually
started flowing back.
(Additonal reporting by Caroline Valetkevitch; Editing by
Kenneth Barry; Wall St Week Ahead runs every Sunday. Comments on
this one can be sent to Edward.krudy(at)thomsonreuters.com)