The Great Rotation Myth

The rallying cry of the bulls has been a "Great Rotation" out of "safer" assets like bonds and into "riskier" like stocks. The argument goes that stocks trade at fair valuations but are relatively cheap compared to bonds of all stripes. There are many flaws in this argument but the main reason I don't believe we are at the beginning of a "Great Rotation" is demographics. The baby boomers are in or near retirement and a secular move into riskier assets is unlikely to occur under these conditions.

It is undeniable that there has been a rotation into riskier assets in recent months. Hedge fund surveys and actual positioning reports from broker dealers show higher gross and net exposures from hedge funds. Sentiment surveys like the NAAIM & AAII combined with inflows into stock funds show that advisers and the public have had a  stronger risk appetite as well. While data on institutions is sparse, I have been hearing anecdotal evidence that they are feeling more comfortable with riskier assets. I believe this is  a cyclical rotation seen in the latter parts of a bull market rather than the beginning of a secular move.

The following excerpt on baby boomers comes from Wikipedia:
baby boomer is a person who was born during the demographic post-World War II baby boom between the years 1946 and 1964, according to the U.S. Census Bureau

... Baby boomers control over 80% of personal financial assets and more than half of all consumer spending

The oldest baby boomer is now 67 years old. By 2020 more than half of baby boomers will be over the age of 65. The vast majority of pension assets are for the retirement of the baby boomer generation. A great secular move towards risk seems highly unlikely to me when the group that controls the majority of assets are heading towards retirement or already in it.

I believe it is far more likely that we are in the latter part of a cyclical bull market than at the beginning of a "Great Rotation" and secular move into risk assets. We have had a four year bull market where the S&P 500 has had a total return of roughly 135%. This "Great Rotation" argument is a rationalization for those who have missed the move to follow their primal instinct to herd. "The Internet Is The Future" was the rationale for throwing caution to the wind during 1999. While the slogan was true the investment implications were disastrous. With that said, the market did not top out for another year after we started hearing that catch phrase.

 

9 comments:

jc1000 said...

So we go on to make new highs in the upper 1500s without even a 1% correction?

Monday links: bogus betting bans - Abnormal Returns | Abnormal Returns said...

[...] Is the ‘great rotation‘ just an excuse?  (Capital Observer) [...]

OR - said...

Tsachy, do you think cellcom israel (CEL) is a good investment at this price  ?
Very competitive market, but seems pretty cheap to me.
Any thoughts ?

Thanks

Tsachy Mishal said...

There is fierce price competition and its difficult to know what profits will ultimately be. Without an idea of when profits will stop falling its difficult to put a price on the stock. There are too many cellular companies with a population of less than 8 million people.

OR - said...

Thanks, got your point.

Another thing, according to google, Partner Communications (PTNR) has a P/E of 16.92, while Cellcom has a P/E of 5.65.It seems to me that they face the same difficulties. Do you see a possible pair trade here ?

Tsachy Mishal said...

Im not so familiar with the company but I can give a guess as to why there is a P/E difference:
They trade at a similar EV/revenue. It could be that the market believes in the long run profit margins will converge for the industry
I am not familiar enough with these companies to give more than a guess.

OR - said...

OK, thanks again Tsachy, always appreciate your analysis.

dadzers said...

HEY TZACHY, great call on CIM !!.. how high do you think it can go.?

Tsachy Mishal said...

My original price target was close to $3.50 but book value growth did not come in where I expected it to. Its possible that they are being conservative or that NLY is trying to steal the company. If the book value number is correct than we are currently trading at a fair price. I sold already.