The great rotation on Wall Street into stock funds and out of bonds risks falling apart.
Defying the worst January for the S&P 500 since 2009, investors have sunk $152 billion into equities this year, after a gangbusters 2021 for both stock returns and flows, according to JPMorgan Chase & Co.
But strategist Nikolaos Panigirtzoglou at the U.S. bank warns stock managers are set to join their outflow-lashed peers in the bond world as upcoming Federal Reserve rate hikes spur volatility just like in 2018.
Back then, performance-chasing investors funneled capital into equity funds in the first quarter -- only to divest en masse as monetary policy tightened further.
“There is a good chance that 2022, in terms of equity fund flows, will look like 2018,” Panigirtzoglou said in an interview. “It started very strong in continuation of the previous year, but at some point that flow picture will be wilting.”
With bond funds seeing a $20 billion withdrawal, this quarter is shaping up to the biggest win for stock allocations since 2013. The diverging flows -- which followed a retail trading boom born out of the depths of the pandemic boredom -- are noteworthy because individual investors largely dumped stocks in favor of bonds during the 10-year bull market that started in March 2009.
Of course, calls for a great rotation have surfaced from time to time, with none proving durable. Thanks to faster price appreciation, equity allocation from U.S. households has already stood at a record high.
Yet even after the new year bleeding in technology companies, U.S. large-cap stock funds attracted $34.1 billion alone in the week to Feb. 9, the most ever, per EPFR Global data compiled by Bank of America Corp. The inflows arrived amid withdrawals from fixed-income funds.
Cash products, too, are getting hit by outflows -- at odds with calls from Goldman Sachs Group Inc. and Ned Davis Research to hunker down in the most liquid instruments to preserve capital as a disruptive shift in the monetary regime looms.
To Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments, the current taste for equity funds reflects the fact that the S&P 500 has posted three straight years of double-digit returns. As rates rise at a time when profit growth is estimated to slow, he doesn’t view the backdrop as constructive for equities either.