Sy Harding: Investors are going crazy for stocks, piling into individual stocks and equity mutual funds at a near record pace. Investor sentiment polls confirm the high level of bullishness. Margin debt is at record highs. Brokerage firms and polls of investor groups show individual investors have unusually high portfolio allocations skewed to stocks and away from bonds and cash.
Households continue to pull money out of municipal bonds, of which they are the largest holders. Thomson Reuters reported this week that new municipal bond sales hit a 14-year low in February, “as individuals continue to flee from bonds to put their money into the rising stock market”.
But wait a minute.
Who is selling the stock to those clamoring for more? Someone must be, given that stocks are barely up for the year so far. Who is buying the bonds individuals are fleeing from, since demand for bonds seems to have them rising in price in spite of the selling?
That also shows in the data.
The S&P 500 was up 26% last year. So far this year it is up just 1.9%. The Dow is down 1.0% for the year so far. The Nasdaq is doing better, up 3.5%.
However, mutual funds and ETFs invested in 20-year bonds (NYSEARCA:TLT), were down 16% last year, but are up 6% so far this year.
I’m not confident that bonds can continue their 2014 rally. That will almost surely depend on the direction of the stock market. I have been saying for some time that bonds will only rally if the stock market rolls over into a serious correction.
However, gold bullion, which was down 28% last year, is up 12% so far this year. The gold mining stocks, down 49% last year on average, are up 20% so far this year.
In my January 3 column ‘Will 2013 Winners Also Be Winners in 2014’, I noted how it is often a mistake to chase the previous year’s winners after they have already had several years of gains. I quoted John Rekenthaler, V.P. of research at fund-ranking service Morningstar, who says that almost always “Investors piling into the hottest funds of the previous period will be sorry, since the lower ranked funds tend to be the winners over the next three-year period.”
I noted in that column that if it is advisable for investors to choose from the previous period’s losers there was one stand-out – gold.