When the Great Rotation Makes Its Arrival, Will COVID-19 Have Been the Cause?

Advice to the Advisors

Sheaff Brock Money Managers, the great rotation, spinning top

When the Great Rotation Makes Its Arrival, Will COVID-19 Have Been the Cause?

Anticipating a shift of bond holdings into stocks, Marketwatch, in November of last year, began talking about a 2020 “Great Rotation.” Now, a half year later, Bank of America agrees with that prognosis: “The stars have aligned for more stock gains,” with equities being the most attractively valued in decades as compared to bonds.

Advisors will find that, for investors, the coming great rotation will be all about investment yield, observes Sheaff Brock Managing Director Dave Gilreath. Simply put, the current S&P 500 dividend is almost triple the yield on income from 10-year Treasury bonds. For debt investors, as smartasset.com notes, current yield can be an incredibly useful measure of a bond’s value.

To the extent past history is a guide in this matter, Gilreath observes, the ratio of S&P dividend yields to 10-year Treasury yields can be an incredibly useful measure as well. As Matt Fox of Knowledia points out, every time the ratio was this high, equities went on to outperform bonds over the subsequent 12 months (by 31% on average!).

Is there a Coronavirus connection here? Sheaff Brock’s Gilreath believes the virus has served to speed up the bond-to-stock shift, with COVID-19-induced shutdowns causing the Fed to drive interest rates to near zero, shining a spotlight on the gap between bond and stock yields.

At the same time, with the toll COVID-19 has taken on the stock market, it would seem only natural that investors have questions about what they should be doing now. As the CEO of the Colony Group points out, “Many clients are eager to take some form of action, any action.” What’s more, as CPA Jim Baird—also quoted in the worth.com article—says, “…many investors may be actively relying on their portfolio to generate cash for living expenses.”

“Despite the relative attractiveness of stocks over bonds, the highly anticipated ‘Great Rotation’ of investors moving from bonds into stocks has yet to occur,” Markets Insider observes. “Despite the drastic difference in S&P 500 yield and the 10-year rate, investors have not yet rotated into stocks from bonds… That suggests the potential for further upside.”

Gilreath agrees. There are many different prognostications, he observes, about what shape the economic recovery is most likely to take. Will it be U-shaped (depressed for awhile longer, then taking a slow turn upwards)? Will it be more like a Nike “swoosh”-shaped recovery? Historically, Gilreath says, “Recoveries are always V-shaped.”


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