General Question

Steve_A's avatar

Investors shift from stocks to bonds. What does this mean?

Asked by Steve_A (5120points) August 22nd, 2010

Picked up the New York times today for a quick read, and there is apparently and I will quote pieces so I accurately share with you what caught my interest the most in relation to my question.

“Investors pulled 19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.”

“Over all,investors pulled $151.4 billion out of stock market mutual funds in 2008.”

“The stock market rose 7 percent last month as corporate profits began rebounding,but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals.”

“As investors pulled billions out of stocks,they plowed $185.31 billion into bond mutual funds in the first seven months of this year and total bond fund investments for the year are on track to approach the record set in 2009.”

1)What is your opinion on this?
2)Will there be a bubble in bonds because of this?
3)Is this showing a physiological change of people and their money hoping to keep it safer in bonds versus the volatile market?
4)Will stock value investors pick up on this and attempt to take advantage of this?Or is this not a goo idea?

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4 Answers

LuckyGuy's avatar

It is easy to explain the past. The future is more difficult – and that is the one that counts.

From the article above it appears investors were betting that stocks would go down or under-perform the bond market.
Stock went up 7% which is much better than bond yields of 4–5%, so it looks like they guessed wrong.
Will the market go up or down? Will Iran do something stupid? Will there be an announcement that ½ billion eggs are tainted? How about an earthquake in california? Or another oil leak in the gulf? Nobody knows.
It is a crap shoot. You invest what you can afford to lose in what you believe will outperform the rest of the market.
Good luck.

CrankMonkey's avatar

The switch from stocks to bonds is a reaction to the economic turmoil suffered in the last few years. It’s hard to see this preference for bonds as a bubble because issuers promise to return principal on maturity. Primary risks for bond holders are higher interest rates and a default by the issuer. If there are widespread defaults, this would mean that businesses or units of government are failing, and the effects would be felt far beyond the bond market. Past instances of interest rate increases have led to bear markets in bonds, but losses were much less than investors experienced in stock crashes. Stocks can and have gone to zero. Bonds typically retain some value even in cases of default. Hyperinflation or currency devaluation would have to happen to completely wipe out bonds.

Stock investors will eventually come out ahead of bond investors. The pattern in the US market shows bull moves that last longer than a decade followed by flat to down markets lasting longer than a decade. From 1982 until 2000 the Dow Jones went from below 1000 to over 10,000. From 2000 until now, the index has done nothing. Peculiarly, there seems to be a lot of difficulty for the Dow to move past large even numbers. It took decades for the Dow to move past 100, and then again past 1000. If this persists, it might not be until the 2020’s when we see the Dow reach the 20,000 range.

BoBo1946's avatar

The market is still scary. They, like me, don’t know if we are over this recession. Jobs are not there. Until the housing market and jobs come around, it’s still a shaky economy.

Zag_grad2010's avatar

The stock market is very volatile because of two uncertainties: the government and the unemployment rate. Companies are reporting good profits, which should drive people to want to own a piece of a company. However, you have to look if the growth is top line (increase in sales) or bottom line driven (cost cutting such as less employees). That distinction aside though, people seem to not want to put money into stocks because companies don’t know how new fiscal policies and regulation by the government will affect them. Companies are sitting on a record amount of cash because of this. Why would investors want this since they could sit on that money themselves. If there was more certainty then companies would either use the cash to pay a dividend or for capital expenditures.

The other reason why stocks are volatile is because consumers, which make up roughly 70 percent of GDP, aren’t spending as much as they used to. National unemployment is higher than reported because of the discourage worker effect; the national number is more likely in the range of 10 to 12 percent. Then to compound this lower supply of discretionary spenders, there are millions of people who are afraid of joining the unemployed.

Until the government makes its intentions fully known the stock market will be volatile, but it is a great time to buy. Stocks are undervalued as a whole. Bill Gross of PIMCO, who has primarily used bonds with his company’s $1.1 trillion in assets, thinks it is time to buy DRIP stocks.

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