The stock markets have enjoyed a steady rally over the last few months as investors abruptly dumped bond-related investments and exchange traded funds (ETFs) for riskier and better performing assets.
Beginning at around December, municipal, foreign and long-term Treasury bonds have all started to lose value while equities have experienced a high volume of inflows, writes Paul J. Lim for The New York Times. This change in investor trends indicates that people are becoming more confident in the health of our economic recovery.
Consumer confidence is high, companies are reporting solid fourth-quarter earnings and the economy is doing much better than it was before. IHS Global Insight recently revised upward its projection of U.S. GDP growth to 3.2% in 2011 year-over-year from its previous estimate of 2.4%.
Mark D. Luschini, chief investment strategist at Janney Montgomery Scott, remarks that investors who are now comfortable with higher investment risk in an improving economy will start looking away from bonds and into stocks, specifically blue-chips.
It also doesn’t help the bond investment case when one considers the health of municipal finances, and we have seen a rather large exodus from municipal bond-related ETFs as a result. For taxable bonds, the possibility of interest rate hikes, along with rising inflation, which are signs of an improving economy, have also turned investors away from long-term bonds. [Muni ETFs Suffer Record Outflows.]
If you’re still in fixed-income ETFs that are losing value, it might be time to evaluate whether it’s time to sell. We use a trend following strategy, which has us in and out of the markets at fixed signals.
For more information on the bonds market, visit our bond ETFs category.
Max Chen contributed to this article.