Money Flows & Bond Funds

Much buzz around the blogosphere the past few days about this news out of Reuters:

Bond and money market assets at Boston-based Fidelity now total $848.9 billion, more than half of the company’s $1.6 trillion in managed assets. Ford O’Neil, a top bond manager at Fidelity, underscored the milestone on Wednesday during a media presentation in Boston.

The rise of bond and money market funds, including institutional assets, is a remarkable turn of events for Fidelity. The company built an empire in the 1980s and 1990s on stock funds and star stock pickers like Peter Lynch. Fidelity’s stock mutual funds held $761 billion at the end of June.

One blogger goes so far as to call this the single most bullish data point since the beginning of the Iraq War.   The chart above from JP Morgan Funds via "The Big Picture" blog  the public's disgust with stocks.  

Me?  I'm not so sure about what this means.  We've discussed in the past here ,  here,  and  here.  I'd like to think that at some point all of this money is going to come rushing back into the markets.  Certainly in time I believe some of it will.  Whether that will be from lower market levels or from levels appreciably higher is anybody's guess.  Here's what I think is holding investors back.

1.  Fear of markets, distrust of Wall Street.  This has been covered in many other spots so I'll leave it stand for what it everybody has heard over the past few years.  

2.  Paying down debt/ future obligations.  Given the uncertainties of stocks in the past 10 years investors  have made the choice to pay down debt obligations and to simply hold monies for large future purchases {college} in cash.  It makes sense from this perspective to pay down high interest level credit card debt, refinance a mortgage or pay off a car when you're unsure of what kind of return you can get in stocks.  In re large purchase items like college.  Too many people have been burned the past 10 years in say college savings accounts that have lost 20% just when they needed the cash.  That money may not be earning much but people know what it will be worth when they need it.

3.  Retirement homes.  Something nobody ever talks about and I can't prove it is so far a competition for cash dollars but say today you're 55-60 and you know that somewhere in the next ten years you're going to retire.  You also know that places you might like to go {Florida, Arizona etc} have experienced a massive decline in housing prices.  You might decide that a retirement home/ 2nd home is a better place for your money than the stock market, especially at today's still discounted prices.  The home may not appreciate much in value but it's probably not going to go away unless there's a hurricane.  You also get the advantage of using the property or maybe even renting it out.  Not sure that's a huge competitor for market dollars yet but it wouldn't surprise me if somebody discovers someday that it is.

By the way the piece I penned here back on August 19, 2010 I stated that I thought stocks would outperform bonds over the next 1, 3, 5 and 10 years.  So far that call is proving prescient.  While bonds have experienced a pretty decent rally of anywhere between 14-18% {depending on what index you look at and the time frame you use}, US stock indices are up somewhere between 35 and 45% during that time.  The difference is that bonds have gone up in something of a straight line as yields have collapsed during this period as a result of the Federal Reserve's commitment to keep interest rates low. Stocks have gone higher during this period with quite a bit of volatility.  Individuals don't like volatility.