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BUSINESS GUARDIAN guardian.co.tt JANUARY 5 • 2017
Greed is trumping fear
STAN CHOEInvestors may finally be giving stocks
For years, many refused to buy
into the hype even as the stock mar-
ket climbed to record after record.
Wounds from the 2008 financial
crisis were still too raw, and investors couldn't
stomach the risk of watching their nest eggs
drop by more than half for a second time.
Instead, they favoured bonds, which have
pumped out relatively steady and healthy
returns for decades.
Enter Donald Trump.
Since his surprise victory in last month's
presidential election, stock prices have soared
even higher, and bond prices have sunk on ex-
pectations that faster economic growth and
inflation may be on the way.
The change has been so seismic that inves-
tors poured a net US$20.7 billion into US stock
funds last month. That's the biggest month for
stock funds since 2014 and a stark turnaround
from the nearly US$76 billion that left those
same funds in the 10 earlier months, according
Ignore the dollars lost by funds run by
stock-picking managers looking to beat the
market, which have been deeply unpopular
in recent years, and US stock index funds at-
tracted a record US$41.9 billion in November.
Bond funds, meanwhile, saw money head
out the door. Investors pulled more than US$13
billion from them, with the majority coming
from those invested in bonds issued by city,
state and other local governments.
The flow into stocks and out of bonds may
grow only stronger, many fund managers say,
once investors get year-end statements that
show losses for their bond funds. These funds
are supposed to be the steadiest part of a port-
folio, and many investors may be surprised to
see they too can lose money.
The largest bond fund by assets, Vanguard's
Total Bond Market Index fund, is down 3.9 per
cent in the fourth quarter through Wednes-
day, with almost all of the loss coming since
the November 8 election. It's still up 1.7 per
cent for 2016.
Of course, it's too early to tell whether this
is a big reset in investors' psychology or just
another temporary blip. Analysts and fund
managers have been predicting a "great ro-
tation" from bonds into stocks for years, and
it hasn't happened yet.
One big reason: Interest rates have remained
extremely low in recent years, and falling rates
push up prices for existing bonds. Even after
bonds lost money in the spring of 2013, when
investor worries about a pullback in stimulus
from the Federal Reserve led to a "taper tan-
trum" interest rates began falling again, and
investors quickly returned to plowing dollars
back into bond funds.
Plus, the worst-case loss for a high-quality
bond fund is still much milder than the worst-
case for a stock investment, which can go to
zero, and that sturdiness will always attract
But if the trend of money flowing from bonds
to stocks does continue or even accelerate, fund
managers and analysts say it would provide a
leg of support for the market, which has been
climbing for years without much help from
Such support would be particularly useful
for a market that some investors say is looking
expensive after prices have risen much faster
than corporate profits.
The Standard & Poor's 500 index is trading
at 19.1 times its earnings per share over the last
12 months, above its average of 15.6 times over
the last 15 years.
Among the reasons why fund managers say
this shift from bonds to stocks may be more
1. Bonds are struggling.
Interest rates jumped following Trump's vic-
tory, and many analysts expect further gains in
2017. The yield on the 10-year Treasury note
rose above 2.60 per cent this month from 1.86
per cent on election day. Many expect only
modest returns from broad bond indexes next
year, if they're positive at all. That would be
a big downshift from prior years. The largest
bond fund has returned more than five per cent
in six of the last nine years.
The Federal Reserve surprised investors ear-
lier this month when it indicated it could raise
short-term rates three times in 2017, up from
a prior forecast of two times. Expectations for
inflation are also on the upswing, which pushes
up interest rates.
2.Excitement about the economy is rising.
If Trump and the Republican-held Congress
can push through the corporate tax cuts they've
been discussing, it would mean an immediate
rise in profits for companies, which would help
their stock prices.
The job market is also continuing to improve,
which should help the economy continue to
Investors give stocks another chance
In this Friday, June 24, 2016, file photo, specialist Michael Pistillo wears Union Jack socks as he works on the floor of the New York Stock Exchange. In 2016, Wall Street repeatedly bounced back
from steep slumps, including the worst start to any year for stocks, the second correction for the market in five months and investor fears of a global slowdown. It also weathered plummeting oil
prices and the surprising outcomes of Britain's vote to leave the European Union and Donald Trump's US presidential election win. AP
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