The 'Great Rotation'? More Like The Great Lie

 |  Includes: DIA, QQQ, SPY
by: The Macro Trader

So far this year I think my most hated new term is "The Great Rotation". Supposedly stocks are moving higher as money is flowing from the overpriced bond market and into equities. Since the term has gone ballistic, also known as annoying, we decided to look into it.

Here is a chart from Google Trends showing how search volume has gone crazy. Until the past few months it barely existed although it was moving higher into year end but more on that in a minute. (Click on chart to enlarge)

Gtrends-Great Rotation

Looking at the performance of stocks versus bonds we can see part of the reason why the term was becoming popular. Without reading too much into it, stocks were moving higher while bonds were moving lower…..most of the time. (Click on chart to enlarge)


While stocks have indeed been outperforming bonds over the past few months, the other side of the case for "the great rotation" was that money was coming out of bonds and going into stocks. Well, thanks to the ICI we have data that allows us to look at this idea. Stocks funds saw a large increase in assets of 5.2% from December to January but Bonds also saw in increase in assets. (Click on table to enlarge)

Net asset table-ICI

We are not sure exactly where the rotation is here, so we then broke down the weekly data to see if we could discern this rotation pattern in the data. Well, what we found was that year end and beginning of the year investment trends have a strong seasonal pattern. Want to guess what the pattern is? If you said mixed into year end and positive at the beginning of the new year then you win. Here is the weekly data for equities from the beginning of 2007 to now. We decided to show data from the beginning of October through the end of February in order to give the rotation argument as much rope as it might need. While 2013 has definitely seen the largest January flows since 2007, the reality is that every single January sees positive flows. (Click on chart to enlarge)

ICI-Equity Total Net New Cash-Weekly

What about bonds? Well we already spoiled that surprise earlier with the ICI table so you know that bonds saw inflows but guess what we found? If you said seasonality you win…again. Not surprisngly, the past seven years have seen net inflows to bonds the majority of the time but the flows are a lot smoother at the beginning of the year as investors obviously put a lot of money to work each and every January. (Click on chart to enlarge)

Total Bond Net New Cash-ICI

Here is a chart of the cumulative in and outflows for both equity and fixed income funds. As you can see bond funds have been the asset gathering champions of the past 6+ years as they have seen huge net inflows almost the entire time. At the same time equity funds have been net asset losers. What of course sticks out to us is that over the past little while, equities have indeed made some inroads but that there is zero rotation going on. Let me repeat that- there is zero rotation going on.

(Click on chart to enlarge)

ICI-Cumulative Flows

We know that we have not accounted for ETFs, Closed End Funds, Hedge Funds, etc. But from the data we have seen, with one exception, we are seeing the same thing. Namely that equities are getting more more money but that fixed income is still getting net new money. What is the one exception? We have come to the conclusion that the vast majority of the new money has come from two places: money market funds and all the special one time dividends that got paid out at the end of last year in anticipation of higher dividend taxes this year.

If you want to call a slight drop in assets in money market funds a great rotation, go ahead. But just know that you are full of it. Which gets us to our last point, this is all marketing. I don't know where this meme originated but we would put money on it being from an equity shop that was sick of losing assets both in absolute as well as relative terms, while the fixed income guys were killing it over the past six years. We have not seen a slew of advertisements for the rotation yet, but here is a classic ad that you can refer to anytime your broker, advisor, etc. calls you up with a pitch so that you maintain a healthy degree of skepticism. (Click on ad to enlarge)


Stocks can go up or down while bonds go up or down and there can be great reasons to buy or sell either, but "The Great Rotation" is not one of them.

Happy Trading.