Investors Screaming “Gimme Shelter” by Moving into a More Expensive Asset Class

Gimme Shelter
The Rolling Stones

Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
Oh yeah, I’m gonna fade away

Key Takeaways

  • The demand for bond funds relative to stocks is believed to be the highest on record.
  • When you look at all historical stock market highs, we don’t normally see the level of individual investor pessimism that we see today.
  • Stocks are not necessarily over-valued today—and bonds are not necessarily a safe haven.
  • Let research and academic history be your guide—not your emotions.

As mentioned in my previous two posts   recency bias and negativity bias are leading investors to shift money “under the mattress” into traditionally safe bonds or cash. According to the Wall Street Journal , investor demand for bond funds relative to stocks  is at the highest level on record. Investors have poured $202 Billion into global bond funds and withdrawn $57 billion from stocks . Just in the U.S. China and Japan alone, a stunning $55 trillion is sitting in bank deposit accounts that are yielding essentially zero. Never before in history have individual investors been so bearish on stocks when the stock market is at a record high.

With 35 percent of global bonds offering investors negative interest rates and with U.S. government bonds in the midst of a 35-year bull market, it’s tough to argue that bonds are safe.  We are not in the prediction business at Fortis, but we do believe in academic research and history. At the 1.35 percent low in 10 year bond yields this year, the 10-year was trading at 74 times its price-to-earnings (P/E) ratio. If that seems hard to believe then simply take the bond’s $100 par value and divide it by the 1.35 percent yield– you’ll see it comes out to just over 74.  Compare that to the forward P/E of the S&P 500 stock index, which is trading at 17.1 times earnings and again, it’s difficult to call bonds safe.

Stocks could indeed correct (i.e. fall) by 5 to 10 percent anytime, especially as volatility disappears and we enter the historically poor performing months of August and September. But, bull markets usually end in euphoric stupor of equity over investment. As you can see on the chart below, Wall Street analysts are usually at maximum allocation to stocks on bull market highs, but if anything, they appear to be under-invested right now.

Our crystal ball is cloudy right now. Just remember that bonds can also correct by 5 to 10 percent at any point in time. Bonds of emerging market countries are considered by many to be the new safe haven and are taking in record inflows. But, just last year during the Chinese market scare, emerging market bonds corrected by 15 percent.  Let’s be careful not to allow “Gimme Shelter “ to turn into “It’s All Over Now.”

      “It’s All Over Now”

Rolling Stones

Tables turn and now her turn to cry
Because I used to love her, but it’s all over now
Because I used to love her, but it’s all over now

June 30th 2016 Wall Street is Under Allocated to Stocks.

Sell Side Concensus Indicator

Global Cash Levels at Historical Highs

Global FMS average cash balance