Retail investors are dumping their stocks and pouring their money into bonds at a record pace.
According to Lipper, last week saw the largest-ever outflow from equity funds, surpassing even its 2008 record. About $18.8 billion fled equity mutual funds and ETFs during the week ending February 5. Much of that money went to bonds; last week, $10.7 billion found their way into taxable bond funds, also a record amount.
Concerns over emerging market instability and the Federal Reserve Bank’s tapering of its monetary stimulus led to a sell-off in stocks with the start of the new year. The benchmark S&P 500 index is down about 2% since the beginning of 2014.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, believes stocks may yet see more downside but will ultimately end this year on the upside.
“You're getting a consistent concern about the global financial system,” says Morganlander, “in particular, on the emerging markets side as well as global growth potentially decelerating.”
Along with the Fed having a less accommodative policy, this could mean as much as another 5% correction in the market, says Morganlander. However, those who stay with equities will be rewarded, he believes.
“In 2014, you're going to get paid well for taking on the risk and buying equities,” says Morganlander. “We're going to be in the plus column between 5% and 7% on equity returns. Nothing like 2013, but, of course, positive return.”
Steven Pytlar, Chief Equity Strategist at Prime Executions, believe the S&P 500 will prove to be a better investment in 2014 compared to bonds.
Pytlar looks at the relative value of the Taxable Municipal Bond Fund compared to the S&P 500 by charting the ratio of the two over the past several years. While bonds outperformed stocks from 2010 to May 2013, higher interest rates in the second half of 2013 led to an exodus out of bonds (since bond prices move inversely to bond yields) and into stocks, which ended the year at record highs.
“Some of that money has started to move back into those bond funds that were sold in May,” says Pytlar. “We don't think it's a bigger indicator of weakness in the general economy or in the future of the S&P 500. In fact, with the risk of rates being able to rise back up to 3%, if not 3.5%, throughout the year, we could definitely see the S&P start to perform a little better going forward certainly than it did versus bonds from 2010 to halfway through 2013.”
To see the rest of the discussion on the S&P 500 with Morganlander on the fundamentals and Pytlar on the technicals, watch the video above.
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