Mom-and-pop investors are still putting money into bonds even as the Federal Reserve talks about reducing the size of its debt portfolio and economists expect another interest rate hike in December. Rising rates typically are bad for bond values, so why do investors keep putting money into fixed income holdings?
Jason Zweig of The Wall Street Journal seeks to answer that question, especially since more than 90 percent of the money that went into mutual funds and exchange-traded funds flowed into taxable-bond funds, Morningstar data show.
People are buying bond funds for stability compared with stocks, which have more than tripled in value since the financial crisis.
“They seem to be saying, ‘I’ve done well in the stock market in the past few years, so maybe it’s time to take some of that risk off the table,’” Karen Schenone, director and fixed-income product strategist within BlackRock's Global Fixed Income Group, told the WSJ.
Other investors may be rebalancing their portfolios after seeing strong stock gains, Fran Kinniry, an investment strategist at Vanguard Group, said to the newspaper. People who once held 60 percent of their money in stocks and 40 percent in bonds would now have a 75 percent weighting in equities.
That means investors need to buy more bonds to get back into balance.
“Back in the late 1990s, investors were very momentum-based, buying stocks and selling bonds,” Kinniry told the WSJ. “But now, here we are in the midst of this giant bull market for stocks, and I love seeing that investors are buying bonds instead.”
Meanwhile, Warren Buffett’s favorite market indicator says stocks are in trouble.
The billionaire chief executive of Berkshire Hathaway once wrote that the “single best” way to see if the market is too expensive by comparing the total value of all publicly traded stocks with the total size of the economy.
It’s like determining the value of a car by the horsepower of its engine.
If the value of all stocks is 80 percent or less than the size of the economy, then “buying stocks is likely to work very well for you,” Buffett wrote in Fortune magazine 16 years ago. When the market value is greater than the economy, it’s a sign of excessive investor optimism.
“Today, Buffett's favorite market indicator is flashing its biggest warning sign yet,” Paul J. Lim writes in Money magazine.
The Wilshire 5000 Total Market Full Cap Index, which actually only measures about 3,600 stocks, has a value of $26 trillion, which is 135 percent of U.S. gross domestic product.
“By this measure, stocks are frothier than they've ever been — even in the months leading up to the 2000 dot-com crash or the global financial panic that began in 2007,” Lim writes.
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