The month of January has been pretty interesting for market observers.
In the first week of January, investors poured $26.6 billion into stocks. In the second week, $21.9 billion. In the third, $16.6 billion.
The sharp reversal – which appears to indicate that the retail investor is returning to the equity markets – has strategists across Wall Street buzzing about the "Great Rotation," a big reversal of flows from bond funds into equity funds as the tide finally turns in financial markets and the "New Normal" era of subpar growth and low interest rates draws to a close.
Sure enough, Treasury yields have been rising this month. On Monday, the 10-year yield crossed 2 percent for the first time since April. The bond market is on edge. Recent price action supports the "Great Rotation" story.
However, the uptick in yields hasn't yet been enough to cause the redemptions from bond funds that would characterize a "Great Rotation." Even while money pours into equity funds in January, it's still pouring into bond funds, too.
In the first week of the month, bond funds raked in $9.4 billion of new assets under management. In the second week, $10.6 billion. In the third, $8.0 billion.
Citi analyst William Katz covers brokers and asset managers – the types of companies whose funds play a key role in the "Great Rotation" story.
Katz thinks the big equity flows everyone is excited about are just seasonal. He says January is always a strong month:
Three of the major players in fund management – T. Rowe Price, Waddell & Reed, and Affiliated Managers Group – all reported earnings yesterday. In a separate note, Katz detailed what he heard from their earnings releases regarding the "Great Rotation."
Katz's conclusion, based on their comments: the "it" moment has not yet arrived.
Katz warns clients in his note today, "While we are careful to not derive too much from any one data point, the weekly data is much more suggestive of a seasonal pattern for volumes and not indicative of a structural shift from fixed income to equities, in our view. If the data are merely another seasonal head fake, then we suspect a correction could be looming."
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