Tuesday, August 6, 2013

The Great Non-Rotation

The Investment Company Institute (ICI) estimated weekly net cash outflow from bond mutual funds of $13.5 billion during the week of June 12.  This followed a staggering $10.9 billion outflow the previous week.  So began a steady exodus from bonds and bond funds in June that has continued until now. 

Until recently, bonds were the safe haven du jour among investors who preferred to park cash in low-yielding debt instruments in the wake of the 2008-2009 credit crisis.  Investors never got over their fear of equities, even as stocks outperformed in the years 2009 through 2013 to date.  The dramatic leap in Treasury yields over the last three months changed this attitude, however. 

Since June investors have continued running for the exits in the bond market.  Last month’s bankruptcy of Detroit only added to this impetus and resulted in wholesale dumping of municipal bond funds.  In the last two weeks investors have increasingly unloaded muni-bond funds, so much so that the disturbingly high number of new 52-week lows on the NYSE has been comprised almost entirely of these funds.  Witness Tuesday’s 191 new lows; it marks the first times since June 25 that there were more new lows than new highs.  It’s also the first time since June 25 that there were anywhere near this many new lows.

So with investors running to the exits for bonds, does this mean we’ll finally see the long-awaited rush into equities the experts have been predicting?  Well it hasn’t happened yet as the following chart, courtesy of Dr. Ed Yardeni’s blog (blog.yardeni.com) shows.  

Dr. Yardeni points out that during the two weeks of June 5-12 when bond fund outflows totaled $24.4 billion, equity fund inflows actually had net outflows of $2.0 billion.  Clearly the “Great Rotation” that Wall Street is hoping for isn’t happening.

First it was the euro, then gold and silver, then the emerging markets, then bonds.  One “safe haven” after another has been shot down.  The proverbial “last Indian standing” is the U.S. stock market, yet the average retail investor isn’t exactly making tracks to jump on this bandwagon.  If not stocks, where are investors’ funds going?  For now the movement is into cash as investors remain unconvinced that long-term stability has returned to the financial market.