Another bold market prediction is providing grist for the headline mill. This latest high-profile prognostication calls for “The Great Rotation” of investment dollars out of bonds and into stocks in 2013.
So far, though, the theory has proven to be more provocative than prescient.
Granted, U.S. stock mutual funds have attracted almost $20 billion so far this year, but that’s only half of what investors poured into bond funds. In fact, January marked the seventeenth straight month investors were net purchasers of bonds and bond funds.
The theory
The theory, as espoused by Bank of America, among many others, posits that persistent market volatility in the last decade, which prompted investors to seek refuge in the bond market and cash investments, would give way this year to more sustained growth in most economies. Moves by governments to address deficit spending along with a rise in consumer confidence will ultimately lead to a massive flow of investment dollars into equity funds from the safe haven of bonds.
While investor appetite for equities has clearly increased, there’s little evidence it’s coming at the expense of bonds. It is more likely the equities boost is being driven by cash holdings, where investors flocked after the 2008 market collapse.
Continued appetite for bonds
Clearly, there are no signs that investors’ affinity for bonds has ebbed. Bond inflows over the past four years have averaged over $550 billion, according to Reuters, and so far this year, inflows to bond funds are on pace with 2012.
Though audacious, there’s no data to back up the claim of a cataclysmic shift. Any movement is likely to be at a glacial pace. Even BofA said such a move is “unlikely to be a straight line,” which seemingly undercuts its own prophecy.
Once again, like most bold predictions, its greatest effect seems to be on headline writers. We, on the other hand, expect to see repetition, not rotation, as investors continue to seek the quality, security, income and high after-tax returns provided by municipal bonds.