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