Whatever happened to the “Great Rotation?” You remember the predictive theory that ultra-low yields would encourage investors to rotate out of bonds and into stocks. The notion picked up steam shortly after the Federal Reserve announced its intention to taper its quantitative easing (QE) program in May of 2013. Yield-sensitive assets of all stripes — corporate bonds, Treasury bonds, munis, preferred shares, REITs — experienced the type of rapid wealth destruction that is more commonly associated with significant stock slumps. Meanwhile, U.S. stocks weathered the initial uncertainty, rallying throughout the remainder of the year.

Granted, one asset type may appear to curry favor at the expense of another asset type. That certainly seemed to be the case when bonds experienced their first negative return in two decades; it certainly appeared to be a reasonable conclusion when the S&P 500 logged a monster annual return of 30%. However, it is impossible to determine if capital outflow from bonds actually became additional inflow for stocks. For one thing, the disappearance of bond wealth does not require a corresponding move into equities; bond prices can fall independently. What’s more, since there is a buyer for every seller of all stocks and all bonds, if one group of investors has rotated from bonds into stocks, another group of investors would need to represent the other side of shift. What crowd, then, represented the other faction that abandoned stocks for the low-yielding bond world?

I am not suggesting that money does not flow in and out of perceived value. I am merely uncovering the reality that an opposite (and equivalent) grouping must exist as well. Which is the dumb money — the bond buyers at historically low yields or the stock buyers at historically high price-to-earnings (P/E) ratios? Or maybe the smart money is shifting into undervalued emerging market securities.

Regardless of where you stand on the rotation debate, the price gains and losses for a variety of ETF types in 2014 may surprise you. Why? Because last year’s winners have had a rough go of it lately. In contrast, last year’s losers have been basking in a warm glow of ascendancy.

The Momentum “Faves” From 2013 Are Hurting
Approx 3 Month %
Social Media/Internet
Global X Social Media (SOCL)-14.8%
PowerShares NASDAQ Internet (PNQI)-6.9%
China Tech/Internet
Guggenheim China Technology (CQQQ)-4.9%
PowerShares Golden Dragon China (PGJ)-4.8%
Consumer Discretionary
SPDR Retail (XRT)-3.3%
SPDR Select Sector Consumer Disc (XLY)-3.2%
Biotech/Small Health Co
PowerShares S&P Small Cap Health (PSCH)-3.6%
Market Vectors Biotech (BBH)-2.0%
Small Cap Growth
Vanguard Russell 2000 Growth (VTWG)-2.8%
iShares Russell 2000 Growth (IWO)-2.5%
While Last Year’s Losers Are Back In Vogue
Emerging Markets
WisdomTree India (EPI)15.0%
iShares MSCI Brazil (EWZ)10.2%
Long Duration Bonds
PIMCO 25+ Year Zero Coupon (ZROZ)12.5%
Vanguard Extended Duration Treasury (EDV)11.2%
Precious Metals/Metal Miners
Market Vectors Gold Miners (GDX)13.2%
SPDR Gold Trust (GLD)6.1%
SPDR Select Sector Utilities (XLU)12.4%
Vanguard Utilities (VPU)11.6%
PowerShares DB Agriculture (DBA)17.3%
GreenHaven Continuous Commodity (GCC)11.0%

There are those who believe that U.S. stocks are poised for another banner year. For the most part, they are the same folks who subscribe to the idea of a “great rotation” as well as forecasts for economic acceleration. Fortunately or unfortunately, the evidence points to an economy that is capable of muddling along if there is Federal Reserve stimulus in place. With less of it, or without it entirely, the economy may not be able to stand on its own. This is why long-maturity bonds have been rising in price; this is why safer haven equities in the utilities sector have been surging ahead.

Over the last few months, I have shifted some client money away from “overpriced” growth areas; I have been a net seller of  funds like iShares Russell Microcap (IWC) and PowerShares Pharmaceuticals (PJP). Similarly, I have shifted some client money into less volatile segments of the U.S. market; I have been a net buyer of funds like iShares USA Minimum Volatility (USMV). Indeed, U.S. stocks can still log a venerable performance in 2014, though it will likely require the Fed to suspend a tapering increment and/or serve up a unique promise about the longevity of its zero-percent-interest rate policy.