The 'Great Rotation' Fallacy
I have heard a lot about the "Great Rotation" over the last few days. This is a theory that investors have been pouring money into the bond market, but as the economy improves and fear of tail events dissipates, these investors will rotate into stocks. For a narrative that has so much acceptance, there is very little evidence behind it. As I wrote last week, I'm growing more bearish on bonds but the Great Rotation thesis is a poor one. Indeed, following it can lead to some very poor asset allocation decisions.
Have investors actually been pouring money into bonds? Mutual fund flow data suggest that retail investors have been consistent buyers of bond funds, even after the worst of the financial crisis abated. According to the Investment Company Institute, general bond funds have increased 77% in assets since the end of 2009. In isolation, this fact would cause one to assume that retail investors are pouring into bonds, either because they are fearful of other assets or myopic about the risks of bonds. But digging a little deeper gives us another story. The chart below shows "strategic income funds" (the broadest bond market category that ICI tracks) by total assets (yellow) and a three-year rolling change in assets (blue)....371 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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