
Reuters / Lucas Jackson
- The reversal of a multi-year pattern may have been accelerated this month as rates of interest spiked greater, in keeping with a word from Leuthold Group’s James Paulsen.
- Investor fund flows have began to favor shares over bonds, which hasn’t occurred in years.
- “When fund flows have shifted towards shares, it has usually led to management from the market’s ‘most aggressive’ sectors,” Paulsen mentioned.
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Rising rates of interest sparked a risky week of buying and selling for the inventory market, however it may be accelerating the reversal of a multi-year pattern that means extra long-term upside forward for shares, in keeping with Leuthold Group’s James Paulsen.
As rates of interest rise, bond costs fall, which frequently sparks present mounted revenue buyers to query whether or not they personal an excessive amount of of the asset class and never sufficient shares, Paulsen mentioned in a word on Thursday.
And there are probably lots of buyers asking that query proper now, provided that over the previous decade, fund flows have overwhelmingly favored bonds over shares. Even for the reason that begin of 2019, bonds have seen cumulative fund inflows of greater than $1 trillion, whereas shares have seen cumulative outflows of about $600 billion.
And in keeping with Fundstrat’s Tom Lee, 94% of retail fund flows have gone into bonds relatively than shares since 2008.
However extra lately, this pattern has reversed, with shares seeing an uptick in inflows on the expense of bonds.
“This newfound pattern of funding flows most likely has a protracted strategy to go,” Paulsen mentioned, and if that’s the case, the inventory market ought to discover robust help from the brand new cash pouring into equities.
Sectors which have led the market greater throughout a sustained pattern of fund flows into equities are the “most aggressive,” in keeping with Paulsen.
If cumulative fund flows into shares flip optimistic, “not solely may the inventory market proceed to shock to the upside,” however probably the most aggressive sectors may maintain main the market greater, Paulsen concluded.
Leuthold Group