Many portfolio manager commentaries from large, well-known investment companies have, over the past several weeks, generated thoughts about the murky future of the markets and economy. Several appear to lead with the suggestion that an unseen hand is poised to pull on a figurative lever to categorically change broad strategy (asset allocation) from bonds to stocks; this would be called “The Great Rotation.”
Others offer suggestions that the current strategy of asset allocation, which has taken us to significant returns over the past 24 months, is about to combust; this would be called “Bursting the Bubble.” Because of the eye-catching phraseology involved, I fear that readers may feel that these potentialities are faits accomplis.
The Great Rotation, or change in asset allocation from bonds to stocks, is a discussion worth having for those investors and managers who are actively managing assets and trying to generate alpha or returns significantly higher than median. Given that, at some point, it is not unreasonable to expect that stimulative efforts of the Federal Reserve will induce growth and inflation, I believe that we will likely see interest rates rise and turn the favor of investors toward equities. We just don’t know whether this turn will happen during this calendar year. [Municipal Bond ETFs and Migratory Patterns]
Bursting the Bubble relates to the possibility that an overreliance upon bonds as an asset allocation will lead to damaged returns if and when rates do begin to rise. A reasonable definition of the term “Bubble Theory” reads as follows: “A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these bubbles are easily identifiable.”*