Stocks still look more attractive than bonds right now, says Morningstar director of equity research Pat Dorsey.
Pat Dorsey: Hi, I'm Pat Dorsey, Director of Equity Research at Morningstar.
So with the market up 60-odd percent since the March 9 lows, you'd think there would be a little bit of irrational exuberance among investors, right? Money would be pouring into equity funds; people would be excited about stocks; you'd be getting get-into-the-market-now covers on financial magazines.
In fact, that's not the case.
It's very interesting. I thought this would be the case, and then I went and looked at some of the data on retail fund flows, the amount of money flowing into different kinds of mutual funds, which is typically a pretty good indication of the sentiment among individual investors. I was fascinated to find out that basically, flows into equity mutual funds have been basically flat year to date, and bond fund flows are absolutely off the charts. What this leads you to is a really interesting picture of what I might term the "destructive myopia" of most investors, sadly.
If you go back and look over the past decade or so of fund flows and you look at the money flowing into equity funds, you see it was very high in late 1999 and 2000, and it was fairly low for bond funds. Why? Well, not hard to figure out. During the 1990s, of course, stocks beat bonds in a big way. So what did people do? They look in the rearview mirror, and they plunk lots of money into equities, and they don't put much money into bonds.
Now let's roll the clock forward 10 years to today, and after the past decade, Treasuries have returned six, six and a half percent. Equities are basically flat. So what are people doing? They're pulling money out of equities and putting money in a huge way into bonds, over $300 billion year to date.
This picture becomes very clear if you look at a chart of basically equity flows minus bond flows, and you can see that currently the retail investors' preference for equities less bonds is about at the same levels as October 2002. You tell me, was October 2002, a better time to be buying equities or bonds? Well, equities because equities were pretty cheap right then.
Read the complete transcript at morningstar.com here
Pat Dorsey: Hi, I'm Pat Dorsey, Director of Equity Research at Morningstar.
So with the market up 60-odd percent since the March 9 lows, you'd think there would be a little bit of irrational exuberance among investors, right? Money would be pouring into equity funds; people would be excited about stocks; you'd be getting get-into-the-market-now covers on financial magazines.
In fact, that's not the case.
It's very interesting. I thought this would be the case, and then I went and looked at some of the data on retail fund flows, the amount of money flowing into different kinds of mutual funds, which is typically a pretty good indication of the sentiment among individual investors. I was fascinated to find out that basically, flows into equity mutual funds have been basically flat year to date, and bond fund flows are absolutely off the charts. What this leads you to is a really interesting picture of what I might term the "destructive myopia" of most investors, sadly.
If you go back and look over the past decade or so of fund flows and you look at the money flowing into equity funds, you see it was very high in late 1999 and 2000, and it was fairly low for bond funds. Why? Well, not hard to figure out. During the 1990s, of course, stocks beat bonds in a big way. So what did people do? They look in the rearview mirror, and they plunk lots of money into equities, and they don't put much money into bonds.
Now let's roll the clock forward 10 years to today, and after the past decade, Treasuries have returned six, six and a half percent. Equities are basically flat. So what are people doing? They're pulling money out of equities and putting money in a huge way into bonds, over $300 billion year to date.
This picture becomes very clear if you look at a chart of basically equity flows minus bond flows, and you can see that currently the retail investors' preference for equities less bonds is about at the same levels as October 2002. You tell me, was October 2002, a better time to be buying equities or bonds? Well, equities because equities were pretty cheap right then.
Read the complete transcript at morningstar.com here
