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Our smart money indicator reports funds' aggregate asset exposure to U.S. equities and bonds. It is derived based on comprehensive analysis of the top asset allocation Gurus' recent asset exposure. We track two separate indicators:

  1. Top 3 Moderate Allocation Funds (Smart Money)
  2. 481 Moderate Asset Allocation Mutual Funds (Pro Money)

This is calculated weekly, and the chart covers the last one year. For the week ending 12/31/2010, our proprietary model reported equity exposure for the two set of funds was 77% and 66%, respectively.

Trends for the Top 3 Moderate Allocation Funds (Smart Money)

481 Moderate Asset Allocation Mutual Funds (Pro Money)

click to enlarge charts

Two weeks ago, we saw that the continued stabilization of investor appetite for equity was driving inflow into the stock market. This trend remained little changed last week as improved economic data continued to feed positive sentiment.

Rising interest rates will hurt fixed-income assets, and this trend of funds pulling out of bonds and being in favor of stocks is not surprising as many investors believe that the low-interest-rate environment will not last for too long. Some economists are predicting that the U.S. economy will grow at a rate close to 4% for the next two years. Inflation expectations are bound to rise and the Fed won’t be able to keep subsidizing borrowers at the expense of savers forever. Bond investor Bill Gross has recently suggested the end of the bull bond market may be at hand. Warren Buffett also echoed a similar viewpoint, indicating “short-term and long-term bonds are a very poor investment at the present time”.

That said, not all the doubts about the direction of the economy are completely removed yet, and the Fed’s own predictions are that the unemployment rate will stay in the 9%+ range for all of 2011. It’s hard to see the Fed would begin any credible discussion about raising rates until we see some meaningful downward movements in the unemployment figures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Inflation Prospects to Pressure Bonds Soon?