Hulbert: ‘Great Rotation’ Theory Doesn’t Pass Muster

Tuesday, 19 Feb 2013 11:05 AM

By Dan Weil

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The most popular bullish rationale for stocks among the 200 investment advisers tracked by Mark Hulbert, editor of the Hulbert Financial Digest, is that money is migrating to stock funds from bond funds.

“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.”

Investors added $38.07 billion to equity funds in the first four full weeks in January, while bond funds saw $31.58 billion in inflows, according to Investment Company Institute, Reuters reports.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

Over the past 30 years, 1987 is arguably the most relevant to the Great Rotation argument, Hulbert says.

“Beginning in April of that year, following more than 60 months in which fund investors had invested an average of nearly $4 billion a month of new money in bonds, they reversed course in a big way,” he writes.

“Over the next six months, according to the [Investment Company Institute] data, fund investors withdrew an average of $3 billion a month from bond funds.”

And what happened to stocks? They peaked in August and suffered the biggest one-day drop in history Oct. 19.

Meanwhile, he notes, a study published in the May 2012 issue of the Journal of Financial Economics found that while the stock market often rises as investors move assets to stock funds from bond funds, almost all of the gain reverses within four months.

Another study showed that investors move assets from bond funds to stock funds during the summer and do just the opposite in the winter months, he adds.

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

Others are skeptical about the Great Rotation theory too.

“I’m not sure you want to take a couple of weeks and extrapolate it into whatever trend you want,” Tobias Levkovich, chief U.S. equity strategist at Citigroup, tells Reuters.

“We have had instances where equity flows have picked up in the last two, three, four years when markets have picked up. They’ve generally not been signals of a continuation of that trend.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

© 2014 Moneynews. All rights reserved.

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