Chart of the Day – The Great Rotation?

by Enis March 8, 2013 10:16 am • Commentary

Much has been made of the anticipated “Great Rotation” out of bonds and into stocks, after such a strong bull market in bonds over the past several years (and 30 years in total).  But in reality, bonds and stocks have had no problem rallying together for the past 3 years.  In fact, what investors have been rotating out of is pure, old cash.  Since cash now earns 0, investors’ cash allocation is much lower than it used to be.

Here is the chart to prove the point, courtesy of Orcam Financial, by way of the HumbleStudentoftheMarket blog:

Screen Shot 2013-03-06 at 7.39.32 AM


As you can see, the red line that is the historic cash allocation is what has been greatly reduced compared to the 2000-2010 period.  It is now below 20%, compared to a range between 20 and 40% in the prior decade.  Stock allocations around 65% are at the midpoint of the past 15 years, while bond allocations around 20% are near the highs of that period.  In short, the real “Great Rotation” has been out of cash and into bonds, while stock allocations are relatively normal compared to history.

Investors are trying to make up for the lost income from overnight cash (since interest rates are at 0) by diversifying some of that cash into bonds.  However, I see little indication that a new rotation into stocks is imminent.  In the long run, the rotation argument is neither bullish or bearish with allocations at current levels, and deserves to be ignored whenever it’s brought up.