Investors are worried. The only thing that seems to be certain at this point is uncertainty.
The stock market crash in May, the “flash crash” which sent the Dow down for a 600 point loss and then recovery is still without any significant answers. The stock market crash in 2008, while better understood offers us a clearer picture of investor panic. But as stocks rallied, the smallest investor was still inclined to withdraw for the safe haven of bonds.
Now, no one, not even those who are paid to analyze the future of the markets can predict when exactly this “flight to safety”, as moves to bonds and bond funds are often referred to, will no longer be safe. All that can be suggested, with some certainty is what we already know.
In an effort to try and save what they still had, small investors, who had found the risk in stock market mutual funds up until that point two years ago, moved $151.4 billion into bonds. So far this year, even as the rally was picking up steam, even as the economy seemed to be recovering, $185.31 billion more moved into fixed income securities. Now, there is talk of yet another bubble.
The bond bubble has Oleg Melentyev, a credit strategist at Bank of America Merrill Lynch Global Research in New York somewhat concerned. In a recent Bloomberg article he suggested: “Bonds have done so well year-to-date and inflows been so strong” that “at some point you would imagine this one-way move would exhaust itself”. He added that, “There are not so many great alternatives out there, in terms of where do you put your money to work. Equities are still a big question mark.” The only thing that is beyond question is the 27.6% securities have given investors with enough fortitude to stay invested. Bonds have given fleeing investors 8.36% since the trough.
For those who may understand what this might mean, bond yields work inversely to bond prices, with the price going up as investors buy more and the yield offered to those investors falls, Safety is one thing. But taking whatever the market offers is quite another. New records are being set, giving bond analysts cause for concern. Investment-grade U.S. corporate debt was down dramatically to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent. This means that comfort isn’t paying. In fact, it probably isn’t safe either.
Once investors realize that next to zero return for their trouble is actually next to zero return, they will begin to question their own fears and second guess their actions. No one can say for certain when this self-questioning will begin. Could be tomorrow; could be five months from now; could be years away. Only one thing is certain: it will happen.
Stock markets usually adhere to some sort of cycle. After the Great Depression, stocks sold and took decades for the reemergence of any confidence that the profits companies were providing could be had for cheap. Following the Internet bubble, the cycle of sell to buy was much shorter. But as noted in the New York Times, in article written by Graham Boley, what would have been expected has not occurred. Instead of continuing to flee the stock market, even as it rallies, the advent of the individual investor, the one who is solely responsible for their own accounts, risk has taken a back seat to safety.
Mr. Boley writes: “If that pace continues, more money will be pulled out of these [equity] mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.” Much of this problem is attributed to the age of the most common investor, the Boomer. As they enter retirement or close on some targeted age when they would like to retire, they have succumbed to the fear that another market crash or dip would devastate what they have left.
Boley’s observations, also made by Hewitt Associates point to this shift. ”Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008.” That is understandable. But as I have noted in previous posts, had these investors stayed put, did nothing and didn’t panic, many of their ‘losing’ portfolios would have regained much of the lost ground. Some did and some reinvested giving the investment profile of equites a boost but most stayed away. He writes: “[Equity funds investment] is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.”
But trouble is on the horizon. In an August 20 radio interview with Tom Keene on “Bloomberg Surveillance”, Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist suggested that the “extremities of the money flows” is a certain sign that these fixed income investors may be adding to the possibility that the next bubble will be in bonds.
Read more in Bloomberg and the New York Times
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