Stocks and bonds are starting to tell diverging stories. Stocks are stating that economic growth is strong and should be getting stronger. With GDP running under 2% currently that isn’t exactly what I would call a strong growth picture. Bonds on the other hand, have seen yields rise in response to equities rise which is normal. However, the recent decline in the yield on the thirty-year treasury bond to 2.98%, has yields going in the wrong direction. If yields are declining, money should be exiting stocks. We have now reached an interesting point of argument with the yield decline back below the 3% level and stocks still trading near or above their record highs.
Early in the year all the ‘experts’ were looking for the great rotation to begin and fuel stock prices even higher. The rotation was to be investors exiting bonds to buy stocks. Thus far that event has not evolved, in fact, most of the money in bonds has stayed put, and the recent inflow into bonds has been a positive for the sector, and in turn, has raised multiple questions about the future of stock prices.
Our question, which indicator is right? For me, I would lean more towards bonds being correct. TrimTabs is reporting first quarter money flow into stock mutual funds and ETFs (exchange traded funds) to be 52 billion dollars. For the same quarter last year 87 billion dollars exited those same funds. Those numbers would lead you to believe that some of that money had to come from bond mutual funds and/or ETFs. The money flow into bond mutual funds and ETFs actually grew by 65.7 billion dollars. That was the largest growth since 2006. The flow of money in the first quarter is almost as confusing as the charts of the two asset classes compared to each other. The money flow into bonds shows there are still fears related to global growth and is seeking safety. The flow into stocks shows the desire to jump in on the runaway uptrend in stocks before it is too late.
The bond market is more accurate as a predictor of future stock market direction than stocks. Looking at the chart of the 30 year treasury bond you could say it is overextended on this move higher, but it is more than likely correct in stating that the progress in stocks is likely to be little slower for awhile.
The economic data this week is essentially stating the same thing. Of the key data points on the week only one met or exceeded expectations. That has led to the obvious conclusion that March showed slowing growth to end the quarter. Will that show up in the earnings reports? Is this the beginning of a trend for the economic reports going forward? The data only fuels the argument of which is right. Will the market pick up or slow down relative to stocks and growth? Being that I hate speculation, we will have to watch and deal with the data as it is presented.
The other challenge presented this week to investors comes in the form of ‘Fed speak’. Several of the Fed Presidents have eluded to the need to be less ‘accommodative’ with asset purchases and stimulus in the form of money supply. If that is true, investors will have a negative reaction to any withdrawal of stimulus. Without it, many believe stocks prices would be 3-7 percent lower.
And one final thought on money supply moving into bonds, how much of the money flowing in is a result of the Cypress money grab from bank depositors? Are other countries putting money into US bonds as flight to safety or confidence the US will not tax or confiscate depositors money. Time will tell, but it just adds to the list of questions yet to be answered about the current money flow and the emotional state of the investor looking forward.
Stay focused on your portfolio and manage your risk one day at a time as this all unfolds.