At The Expense Of Equites

A reader asks can you tell if fixed income vehicles are going to suck up the inflows and dampen inflows for equities?

I'm not aware of a statistical way to specifically isolate an answer that is forward looking.

FWIW, subjectively I believe one can reasonably assess what parts for the fixed income and cash markets should benefit from less demand for equities but this would be more touchy feely than absolute.

Riskless paper above 5% that only goes out a couple of years is compelling, of course now most of the curve is below 5% but I would not take 5% for 30 years.

I think the question here should be what will "suck up" demand as/if money rotates out of dollar denominated assets. Here it makes sense to look to commodities and foreign stocks/bonds/cash, nothing new with this idea.

I think the middle of the curve has to move higher in yield (I am thinking gradually over a couple of years) to keep foreign investors interested. Between here and there would be some selling. I am not very optimistic about US stocks for the next couple of years and so again there could be some selling there as well.

If this is how it plays out the money that would rotate out of US assets would go somewhere. Foreign assets and commodities seem like a logical destination.

This is not a prediction for a 40% decline for the US stock market, 12% treasury yields or the dollar index at 50. I just see things weakening some. Outperformance will come from knowing to underweight the US and overweight foreign.

However, and this is where it might sound like I am fence sitting, history shows us that in most decades the US stock market has two or three great years (up more than 20%) mixed in with flat and down. This decade has only had one great year, 2003. The above negative expectations could still play out but allow for 2008 or 2009 to be a great year. I believe that history repeats itself. The 1970's were a horrible decade for stocks yet the market was up 31% in 1975 and 19% in 1976. That we would have another very good year at some point in this decade seems reasonable.

The point is about moderation. If the US market is up 30% in 2008 (not a prediction just an example) a portfolio with no US exposure in favor of all foreign would probably lag very badly.