It has been reported that there were very large net inflows
into equity mutual funds in January, which reversed a nearly
two-year trend. As a result, equity inflows surpassed purchases
of bonds by a wide margin last month.
However, for there to be a meaningful rotation, funds need to
flow from bonds to stocks. Bond funds still garnered tens of
billions of dollars in January, which (though less than before)
is counterintuitive to the notion of a Great Rotation.
The 'dash from cash' theory is also plausible but similarly
weakened by continued accumulation in money market funds.
Instead, investors appear to be allocating more for stocks, less
for bonds and trimming their cash reserves.
The economy-wide allocation for equity in December 2012 was
not terribly shy of normal levels, thereby stifling theories that
investors have been keeping away from equities (and are therefore
now more likely to embrace stocks).
For those still seeking shelter in bonds, expecting the
generous returns from the past three decades would not be wise.
Investors who consider the current government bond yield of lower
than 2% a bad deal wouldn't like it a bit to see interest rates
pick up again. Financial markets were temporarily roiled last
week on rumors that the Fed would gradually reduce its
multi-billion-dollar monthly bond buybacks which have kept rates
rock bottom thus far.
The chase for yield is therefore increasingly pushing
investors to embrace higher levels of risk, be it in the form of
junk bonds or emerging market bonds. Even the most bearish of
equity pundits are re-evaluating their 'wait and see' position,
as they are concerned about missing out on reasonable domestic
The S&P 500 is trading at a P/E of about 14x, which is
well within its historical range. Equities, therefore, still
offer compelling value despite the run-up in prices since the
Great Recession. Not only are equity valuations favorable, but
many offer a better yield than government bonds.
) provides a dividend yield of about 2.58%.
General Electric Company
) offers a yield of 3.45%.
Johnson & Johnson
) stand at approximately 3.36% and 2.51%, respectively. We are
not even considering share buyback programs of some of these
income-oriented stocks, which may drive up their composite yield
by as much as a couple more percentage points.
Using our value-oriented approach, we found gazebo stocks in
other sectors as well.
Verizon Communications Inc.
) offers a strong dividend yield of 4.96%, consumer-staple giant
Procter & Gamble Co.
) is at 3.07%,
) provides 3.3% and
Wal-Mart Stores Inc.
) is at 2.26%.
Comparisons of the current robust inflows into the bourses
with those way back in September 1987 -- when investors poured
large sums into the stock market just prior to its collapse --
may be eerie, but the current scenario is not all that
Do we then have a bubble in fixed income securities or is
every dip a buying opportunity? Even if the bond market was to
take a hit for some reason and Treasury prices fall as a result,
that may still not be reason for systematic outflows from bonds
in favor of stocks. Due to the regulatory framework coupled with
demographic trends, pension fund and insurance company managers
may be less supportive of a Great Rotation than they were
GENL ELECTRIC (GE): Free Stock Analysis
JOHNSON & JOHNS (JNJ): Free Stock Analysis
MICROSOFT CORP (MSFT): Free Stock Analysis
PROCTER & GAMBL (PG): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
WAL-MART STORES (WMT): Free Stock Analysis
EXXON MOBIL CRP (XOM): Free Stock Analysis
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