Tags: Great Rotation | stocks | bonds | cash

CNNMoney: ‘Great Rotation’ from Bonds to Stocks Isn’t So Great

By Dan Weil   |   Friday, 01 Mar 2013 08:17 AM

There has been a lot of talk recently about a “Great Rotation” of investors exiting bonds for stocks.

But the numbers don’t back it up. Investors have put more money into bond funds than stock funds in almost every week this year, CNNMoney reports.

U.S. stock mutual funds have drawn almost $20 billion so far in 2013, while bond funds have doubled that with more than $40 billion, according to the Investment Company Institute.

Economist Predicts 'Unthinkable' for 2013

Of course stocks have surged so far this year, while Treasurys are little changed. So where is the bond money going? Much of it appears to have migrated to junk bonds and municipal bonds, which have performed well.

As for stocks, which reached new five-year highs (on the Dow Industrial Average) Wednesday, they may be seeing money that’s coming out of cash.

After sliding from a peak of $4 trillion in 2009, cash levels spiked late last year amid fears of the fiscal cliff, Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock, tells CNNMoney.

Once the cliff was averted, investors exited cash and are now putting that money into stocks, Rosenberg says.

Mark Hulbert, editor of the Hulbert Financial Digest, doesn’t see that money is migrating to stock funds from bond funds either.

“I suppose it is conceivable,” he writes in The Wall Street Journal. “But a careful review of historical fund patterns doesn't provide much support for this so-called Great Rotation argument.”

Hulbert adds, “Even if a Great Rotation out of bonds comes to pass, it doesn't mean investors will move all of that money into stocks.”

Bill Gross, co-chief investment officer at fund giant Pimco, is wary of U.S. bonds. “Corporate credit and high yield bonds are somewhat exuberantly and irrationally priced,” he writes in his monthly commentary.

“Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile.”

He recommends the bonds of Brazil and Mexico, countries with high interest rates and sound economies and balance sheets.

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There has been a lot of talk recently about a “Great Rotation” of investors exiting bonds for stocks. But the numbers don’t back it up.
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