Dow hits 14,000 — so where's the great rotation?

Bond fund still reporting net inflows; dash out of cash

By Jason Kephart

Feb 1, 2013 @ 3:25 pm (Updated 6:21 pm) EST

Stock market, bonds, stocks, Dow Jones Industrials
Suddenly, this is where the action in ((Photo: Bloomberg News))

Investors fell back in love with the cult of equities in January. The long-predicted rotation from bonds to stocks, however, hasn't kicked in yet.

Stock mutual funds had approximately $41 billion in inflows in January, research firm Strategic Insight estimates. That's a sharp turnaround from the $23 billion investors withdrew in December and the $100-plus billion they withdrew during the entire calendar year.

The change in attitude toward stock funds has been attributed to a number of factors, including the “January effect” of selling for tax reasons in December then reinvesting in January. Retail investors finally seem to be catching word of the stock market rally of the past few years, as well. With the Dow Jones Industrial Average topping 14,000 for the first time since October 2007, it's a fair bet that word-of-mouth will only grow.

“The real psychological impact will come when everyone screams stocks are at a new all-time high, which we're not far from,” said Bob Doll, chief equity strategist at Nuveen Asset Management LLC. The Dow's all-time high is 14,164.

The money being funneled into stock funds hasn't been diverted from bond funds, though, as many had predicted. In fact, bond funds had $41 billion in inflows in January, according to Strategic Insight, much higher than the $27 billion in inflows bond funds averaged monthly last year.

Indeed, the big loser in this great re-balancing act appears to be banks. More than $114 billion was pulled out of bank deposits the first week of the year, the biggest single week of withdrawals since 9/11, according to Bloomberg. Another $30 billion was pulled out of retail money market accounts in January, according to the Investment Company Institute.

“People are getting tired of earning zero on their cash,” Mr. Doll said.

The reason people haven't started rotating out of bonds, which have had more than $1 trillion in inflows since 2008, is because there's still some uncertainty around the health of the economy, said Jeff Rosenberg, chief investment strategist for fixed income at BlackRock Inc. Fourth-quarter growth domestic product unexpectedly retracted, and the unemployment rate ticked up to 7.8% on Friday.

Manufacturing, meanwhile, seems to be rebounding. The Institute for Supply Management index rose to 53.1%, from 50.2% in December, beating analysts' expectations Friday. When the index is over 50%, it shows that manufacturing is expanding.