Stop us if you’ve heard this one before: After years of bond- and money-market fund inflows and equity-fund outflows, investors grow fearful of a rebound in yields and the potential for capital losses in fixed-income, sparking a “great rotation” out of bonds and into equities.
That scenario, which implies the potential for a final, euphoric surge to what’s often been described as the “most hated” bull market in stock-market history, has been regularly predicted ever since the 2013 “taper tantrum” that drove a temporary spike in Treasury and other bond yields. Indeed, such predictions are now usually met with derision, acknowledged Julian Emanuel, chief equity and derivatives strategist at BTIG, in a Wednesday note.
But such a phenomenon has marked the “late innings” of “all great bull markets,” he argued. And the current run-up from the March 2009 low is unlikely to be an exception.
“After almost 11 years of equity market rally off the 2009 low, it is futile not to call this a ‘great bull market’. It is,” Emanuel wrote. “And the public will ‘fall in love’ with stocks once more — potentially sending prices materially higher from these already ‘commanding heights’ — before the bull market ends.”
Stocks have indeed soared despite equity fund outflows. The S&P 500 SPX, +0.29% rallied more than 28% last year for its best performance since 2013, while the Dow Jones Industrial Average DJIA, +0.60% rose more than 22% for its best year since 2017. Over the last decade, the Nasdaq Composite provided a total return, including reinvested dividends, of 347%, according to Deutsche Bank, while the S&P 500 returned 256%.
Meanwhile, individual investors did put money into equity funds in the week ended Dec. 26, but that was only the third weekly inflow since late in the second quarter of 2017, according to data from EPFR.
Emanuel noted that the public remained a huge buyer of bonds and a steady seller of equities over the latter half of the last decade as money-market balances rose to levels seen only during the worst days of the 2007-09 financial crisis (see charts below)....