Glass half full: Great rotation?
On the bullish side, we are seeing the signs of cash coming from the sidelines and a shift from bonds into equities. Since 2009, there has been significantly more money in bond flow over equities. Many have been looking for the “Great Rotation” which could be a tailwind for stocks for several years. The good news is that there are signs of this. Investors are running away from high-yield (a bit of a misnomer now as high yield in Europe yields less than US Treasuries) and into equities at an all-time high rate.
Glass half empty: Retail euphoria
Most professional investors view retail investors as a contrary indicator as they typically buy high and sell low. If this is in fact the case, it looks like trouble. Retail investors have been incredibly cautious since the Great Recession and have been underweight stocks. It appears that they have finally joined the party since December. This is a bit of a frightening chart looking at E-Trade and TD Ameritrade as a percentage of NYSE trading. It is parabolic!
We still view the macro environment to be positive. Corporate earnings are strong, inflation is tame, and interest rates remain low. However we are also realistic. The market has enjoyed the least volatile environment in history. We haven't seen a 5 percent pullback in over 400 days! We wouldn't be surprised by a 5 percent or even a 10 percent setback sometime in 2018 and that will test the resolve of investors that are late to the party.