The stock market is sending Janet Yellen a crucial message

REUTERS/William West

Fed Chair Janet Yellen is relayed a message.

If the equity market truly believed the Fed's assertion that the economy is strong enough to withstand higher interest rates, it would be fleeing from stocks offering high yields.

It's doing the opposite.

Companies in sectors that serve as bond proxies - telecom, utility and real estate - were the only ones to see net buying last week, along with industrials, according to client data compiled by Bank of America Merrill Lynch.

Those flows match a broader market rotation into high-yielding stocks, which offer a competitive alternative to bonds - usually by paying dividends - when interest rates just aren't cutting it.

And while BAML finds their clients are increasingly using ETFs to play the equity market, those that still deal in single stocks are hitting eject on riskier sectors in favor of fixed-income surrogates.

Bank of America Merrill Lynch

Stock investors have been far kinder to bond proxies than cyclical stocks when selling out of holdings.

So far this year, they've pulled more than $16 billion out of cyclical industries - consumer discretionary, financials, energy, industrials, materials and tech - but only removed $1.8 billion from bond proxies, BAML data show. The dynamic was even more exaggerated this past week, as clients put $145 million into bond proxies while pulling $784 million from cyclicals.

"Flow trends for bond proxy sectors relative to other sectors in recent weeks and year-to-date suggest clients may increasingly believe rates are likely to stay low," BAML equity and quantitative strategists led by Jill Carey Hall wrote in a client note on Tuesday.

The ETF market has also gotten in on the action. Over the past 40 days, more than $1.7 billion has flowed into consumer staple and utility funds, according to data compiled by Strategas Research Partners. On the flip side, over $2 billion has been pulled from ETFs tracking tech, industrial and material stocks over the period.

Yet despite the stock market's yield-hungry stance, Janet Yellen doubled down on her hawkish rhetoric on Tuesday while delivering a speech on the economy. She reiterated that conditions at present time are strong enough to withstand higher interest rates, even though inflation has been lagging the Fed's target.

In other remarks, Yellen also said it's unlikely that another financial crisis will occur during our lifetime. And judging by an S&P 500 that's sitting just below record highs, that's something the stock market can actually agree with.