A 'violent rotation' is taking place in markets
Since the election of Donald Trump, investors have pulled money out of bond funds and moved into equity funds at an unprecedented rate.
If Trump's fiscal spending plans actualize, investors expect that they would lift domestic growth and inflation. The former could be good for stocks, while the latter would erode the expected returns on bonds.
"If Brexit marked 5,000 year low in global interest rates, Trump marked [the] moment investors started to position for [a] bond bear market," said Michael Hartnett in the note. The UK voted to leave the European Union in June sent investors scrambling for the safety of bonds, sending yields lower.
Fundstrat's Tom Lee said in a note on Friday that equity Exchange Traded Funds (ETFs) witnessed the some of the largest inflows in more than two years during the past two weeks. Also, outflows from bond ETFs last week ranked near the biggest ever.
"Inflows into equity ETFs over the past two weeks are the largest since 2009 (~$50b) - investors have liquidated more than $2T of equities in the past decade and if such inflows are sustained, it would represent a significant tailwind for stocks," Lee said.
Hartnett said there was a record weekly inflow into financial-sector funds. Bank stocks have soared since Trump won on bets that interest rates could rise, tax rates could fall, and some or all of the Dodd-Frank Wall Street reform law could be weakened or repealed.The idea of a "great rotation" of funds from bonds to stocks has been touted in markets many times over the years, only for the bull market in bonds to rage on.
But in a note on Friday, Sean Darby, the chief global equity strategist at Jefferies, said - without using the phrase - that the great rotation is here.
"Last week's fund flow data may go down in history as the first real indication of the switch from bonds to equities," Darby said.
Meanwhile, emerging-market assets have suffered big outflows. Investors pulled more money out of emerging-market equities on net that they have in 14 months. Emerging-market debt funds had the biggest weekly outflow ever.
Bond markets and currencies in Mexico, Brazil, Russia, and other countries sold off along with US Treasurys in the wake of the election.
Fixed-income flows tell the same story. Emerging-market debt ranked first last week in outflows as a percentage of assets under management.