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Industrial Products India, Industrial Manufacturers & Suppliers


The Great Rotation has begun

The ‘Great Rotation’ has begun
According to the U.S. Department of the Treasury, the public owns about $1 trillion in long-term Treasury bonds (most U.S. debt is shorter term). Using the iShares Barclays 20+ Yr Treas.Bond ETF TLT +0.97%  , we can evaluate the percentage change in the value of long-term bond holdings that exist both in bond funds/ETFs and individual bonds. Year-to-date, TLT is down about 12%, which translates into a $120 billion reduction in wealth for bonds investors since the beginning of the year.

What is of greater concern is that TLT experienced a 13% decline since May 1, so the wealth reduction that has occurred for Treasury bond investors has actually occurred within the past two months. That is huge. Bonds rarely move that fast, and in the blink of an eye, bond-fund investors find themselves facing a very disconcerting situation. This is what defines the Great Rotation.
Rotating out of bonds and into stocks is not usually a prudent asset-allocation decision because investors in bond funds tend to be doing so to balance other investments in their portfolio. But the temptations are obvious, and the temptations are coincidentally extremely high right now.
With SPDR S&P 500 ETF Trust SPY +0.39%   up 11% year to date and a yield of 2%, the combined return of the S&P 500 is much more attractive than bonds so far. This is when a bond investor approaches his broker about a transition to stocks, even if that means more conservative stocks.

With brokerage firms like Morgan Stanley MS +1.26%  , Goldman Sachs GS +0.37%  , and JPMorgan Chase JPM +1.32%   still bullish on stocks, brokers working for those firms might willingly advise their clients to transition to the stock market. In fact, according to my observations, that is exactly what is happening right now, and that is why the near-term outlook for stocks has turned bullish.
Even greater temptations exist in small-cap stocks, with the iShares Russell 2000 Index ETF IWM +0.41%   up 15% year to date, but with that added temptation comes even more risk. Multiple expansions are happening as a result of the Great Rotation, and that could continue for a short while longer, but it will not last for very long, and that is where the risk exists.

Investors that transition during this Great Rotation will probably have their heads handed to them because not only will they have experienced major losses in their bond-fund holdings, but they may be transitioning to the stock market at what are relative highs, pressing multiples to bubble-like levels. If this bubble results in a decline like others have, it will hurt those Great Rotation investors hardest.
Our current outlook is to expect upward pressure on the stock market, with the occasional buying frenzy, until the rotation ends, but once the rotation starts to wane, which could happen within as soon as a week or two, the market will turn down on a dime and fall aggressively. There are long opportunities now, and there will be shorting opportunities soon, but this is not a buy-and-hold market.


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