Top market analysts split over great rotation thesis for stocks and bonds

By Adam Haigh

How long will it last? The so-called great rotation -- the massive flow of money out of the bond market into stocks -- is increasingly splitting heavyweight analysts.

The cycle of funds out of fixed-income markets and into equities, shown in the chart below, has taken a bit of a breather in recent days. Even so, for Charles Schwab Corp’s chief global strategist Jeffrey Kleintop, the pattern of the past two months marks an important juncture, and he's anticipating the shift has years to run.

That puts the wealth-management firm at odds with Goldman Sachs Group Inc, whose David Kostin this month rebutted expectations the rotation will stand the test of time. Many investors are restricted from moving money out of bonds, and allocations to debt securities are already near the lowest levels in 30 years, the firm's chief equity strategist said. Similarly, Citigroup Inc says there's no such thing as the great rotation.



"What we've started to see in the last couple of months is money start to move out of bonds and into the stock market," Schwab’s Kleintop told Bloomberg TV on Tuesday from Boston. "That turnaround is important. Generally when we see these turns, they tend to last for a couple of years -- they tend not to be very short-term in duration."

What's clear so far: the value of global equities this week climbed above $68 trillion, up from about $65 trillion the day before Donald Trump's victory in the US presidential election. Bonds have lost about $2 trillion in that time. Yields on 10-year Treasuries soared after the shock result as investors ratcheted up expectations for the pace of US rate increases.

'Good Year'
"Higher and higher interest rates and potentially losses in the bond market could mean a continued rotation into stocks by individual investors," said Kleintop. "A backdrop of improving global economic growth and a turn in investor sentiment on the stock market bodes for another pretty good year for stocks.”

On the flip side, some bond veterans are sensing a long-term shift toward higher yields -- a dynamic that could benefit long-term investors in fixed income, though hurt trades betting on price gains.

Bond-fund manager Jeffrey Gundlach is forecasting an end to the three-decade long rally in debt as 10-year yields climb above 3 percent this year. “Almost for sure we’re going to take a look at 3 percent on the 10-year during 2017,” the chief executive officer of DoubleLine Capital said Tuesday during his annual “ Just Markets” webcast from New York.

Meantime, legendary bond manager Bill Gross at Janus Capital Group Inc. has a different threshold. He says that benchmark Treasuries above 2.6 percent would spell the end for the bond bull market -- little more than 20 basis points from levels Wednesday.

How it all pans out may rest largely on how the incoming Trump administration shapes its policies once in office, and what results out of negotiations with Congress. While markets have anticipated fiscal stimulus and faster Federal Reserve rate hikes, the policy-making process in Washington has confounded plenty of prognosticators before.