The myth of the Great Rotation

February 27, 2013: 11:01 AM ET
chart great rotation
While investors have started to add money to the stock market this year, they are also still plowing into bonds. U.S. stock mutual funds have raked in nearly $20 billion in 2013, while bond funds have attracted more than $40 billion, according to ICI data.
NEW YORK (CNNMoney)

As investors begin to dip back into the stock market, chatter about a so-called Great Rotation has been growing louder.

But so far it's proving to be more of a myth.

The Great Rotation came into the spotlight at the end of 2012, when Bank of America Merrill Lynch investment strategist Michael Hartnett predicted that investors who had fled the stock market for the safety of bonds would start to rotate back into stocks.

In fact, investors have added more money to bonds than stocks almost every week this year. In total, U.S. stock mutual funds have raked in nearly $20 billion in 2013, while bond funds have attracted more than $40 billion, according to data from the Investment Company Institute.

Rather than trimming their bond exposure, investors have been adding to stocks at the expense of their cash holdings, said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock.

Related: Bonds are riskier than stocks

"In the panic following the 2008 collapse, investors initially flocked to cash," said Rosenberg, noting that assets in money market funds jumped by nearly 40% to about $3.5 trillion and peaked at $4 trillion in 2009.

Cash levels declined steadily from there until the end of last year when fiscal cliff fears sent investors back to cash. And once a deal to avoid the cliff was struck, assets in money market funds and bank deposits began to fall - that's the money that has been flowing into stocks, said Rosenberg.

Related: Individual investors still nervous about stocks

While the Great Rotation out of bonds and into stocks may still be coming, it won't be anytime soon, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup.

"Unfortunately losing money in bonds may not cause a huge outflow from bond funds which would then pour into stock funds," he wrote in a recent note. Investors didn't start consistently pulling money out of stocks until two years after the tech bubble and stock market peaked in 2000, he noted, adding, "Believing in a rotation now seems fairly premature."

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Still, even shifting from cash toward stocks signals a change in sentiment, according to Bill Stone, chief investment strategist at PNC Wealth Management.

"Perhaps some of the residual fear from the financial crisis that caused investors to shun stocks is starting to dissipate," he said.

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