Greed is trump­ing fear: Once weary in­vestors are giv­ing stocks an­other chance.

The Denver Post - - BUSINESS - By Stan Choe

In­vestors may fi­nally be giv­ing stocks an­other chance. For years, many re­fused to buy into the hype even as the stock mar­ket climbed to record af­ter record. Wounds from the 2008 fi­nan­cial cri­sis were still too raw, and in­vestors couldn’t stom­ach the risk of watch­ing their nest eggs drop by more than half for a se­cond time. In­stead, they fa­vored bonds, which have pumped out rel­a­tively steady and healthy re­turns for decades. En­ter Don­ald Trump. Since his sur­prise vic­tory in last month’s pres­i­den­tial elec­tion, stock prices have soared even higher, and bond prices have sunk on ex­pec­ta­tions that faster eco­nomic growth and in­fla­tion may be on the way. The change has been so seis­mic that in­vestors poured a net $20.7 bil­lion into U.S. stock funds last month. That’s the big­gest month for stock funds since 2014 and a stark turn­around from the nearly $76 bil­lion that left those same funds in the 10 ear­lier months, ac­cord­ing to Morn­ingstar.

Bond funds, mean­while, saw money head out the door. In­vestors pulled more than $13 bil­lion from them, with the ma­jor­ity com­ing from those in­vested in bonds is­sued by city, state and other lo­cal gov­ern­ments.

The flow into stocks and out of bonds may only grow stronger, many fund man­agers say, once in­vestors get year-end state­ments that show losses for their bond funds. These funds are sup­posed to be the stead­i­est part of a port­fo­lio, and many in­vestors may be sur­prised to see they too can lose money.

The largest bond fund by as­sets, Van­guard’s To­tal Bond Mar­ket In­dex fund, is down 3.9 per­cent in the fourth quar­ter through Wed­nes­day, with al­most all of the loss com­ing since the Nov. 8 elec­tion. It’s still up 1.7 per­cent for 2016.

Of course, it’s too early to tell whether this is a big re­set in in­vestors’ psy­chol­ogy or just an­other tem­po­rary blip.

Among the rea­sons why fund man­agers say this shift from bonds to stocks may be more en­dur­ing:

• Bonds are strug­gling. In­ter­est rates jumped following Trump’s vic­tory, and many an­a­lysts ex­pect fur­ther gains in 2017. The yield on the 10-year Trea­sury note rose above 2.60 per­cent this month from 1.86 per­cent on elec­tion day. Many ex­pect only mod­est re­turns from broad bond in­dexes next year, if they’re pos­i­tive at all. That would be a big down­shift from prior years.

The Fed­eral Re­serve sur­prised in­vestors ear­lier this month when it in­di­cated it could raise short-term rates three times in 2017, up from a prior fore­cast of two times. Ex­pec­ta­tions for in­fla­tion are also on the up­swing, which pushes up in­ter­est rates.

• Ex­cite­ment about the econ­omy is ris­ing. If Trump and the Repub­li­can-held Congress can push through the cor­po­rate tax cuts they’ve been dis­cussing, it would mean an im­me­di­ate rise in prof­its for com­pa­nies, which would help their stock prices.

The job mar­ket is also con­tin­u­ing to im­prove, which should help the econ­omy con­tinue to grow.

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