Great rotation may be just a bullish January

WALL Street’s current jubilant narrative is that a rush into stocks by small investors has sparked a “great rotation” out of bonds and into equities that will power the bull market to new heights.

That sounds good, but there is a snag: The evidence for this is a few weeks of bullish fund flows that are hardly unusual for January.

The S&P 500 rose five per cent in January, its best month since October 2011 and its best January since 1997, driving speculation that retail investors were flooding back into the stock market. Heading into another busy week of earnings, the equity market is now knocking on the door of all-time highs.

Late-stage bull markets are typically marked by an influx of small investors coming late to the party – such as when your waiter starts giving you stock tips. For that to happen you need a good story. The “great rotation”, with its monumental tone, is the perfect narrative to make you feel like you’re missing out.

Even if something approaching a “great rotation” has begun, it is not necessarily bullish for markets. Those who think they are early to the party may actually be arriving late.

Investors pumped $20.7bn into stocks in the first four weeks of the year, the strongest four-week run since April 2000, according to Lipper. But that pales in comparison with the $410bn yanked from those funds since the start of 2008.

“I’m not sure you want to take a couple of weeks and extrapolate it into whatever trend you want,” said Tobias Levkovich, chief US equity strategist at Citigroup. “We have had instances where equity flows have picked up in the last two, three, four years when markets have picked up. They’ve generally not been signals of a continuation of that trend.”