Stocks Keeps Rallying, but Investors are Buying Bonds Instead

investing-paperThe SPDR S&P 500 ETF Trust (NYSE:SPY) is set to open at a new all-time high this morning, yet the average investor isn’t buying this year’s rally one bit.

That’s because they’re worried that stocks will crash again like they did eight years ago (although a crash might be a good thing). From CBS News:

Even as the Standard & Poor’s 500 index was setting a string of records through July, nearly as many dollars were leaving stock funds as entering. Investors are still skeptical of a market that hurt them so painfully during the 2008 financial crisis.

The hesitancy isn’t surprising, even seven-plus years after stocks began one of their longest-ever runs, given the long list of worries hanging over the market. Chief among them is that companies’ stock prices have risen more quickly than their profits, leading to worries that stocks are too expensive. Economic growth around the world also remains slow, and companies are having a tough time drumming up more sales. The wild, down-and-up ride that stocks have been on for the last year hasn’t helped either.

It’s possible that a lack of Main Street participation in this year’s rally is a bullish sign for stocks, however. If the markets can fly to new all-time highs with so many investors bearish, imagine what can happen if sentiment swings to the bullish side.

For now, investors are flocking to bond funds, despite record low interest rates:

Nearly $163 billion poured into bond mutual funds and ETFs in the first seven months of the year. A quarter of that came in July alone, the same month when the S&P 500 and other stock indexes were setting records.

Interest rates are still low, which means that bonds are producing relatively low amounts of income. But prices for bonds rise when rates fall, and the weak global economy has been keeping a lid on rates.

Some prominent analysts see the flight to bonds creating the largest bubble in the asset class’ history, but others aren’t worried.

Regardless, it’ll be interesting to see how the situation plays out with the November election looming. Volatility has been ultra low for the past year, but that promises to change as we get closer to determining the next president.

SPY-2016-08-24

The SPY rose to $219.02, up $0.09 (+0.04%) in premarket trading Wednesday. The largest ETF tied to the S&P 500 index has gained almost 8% year-to-date.