After the Federal Reserve Board passed last week on the opportunity to begin cutting back on the $85 billion in government securities that the central bank is purchasing each month, Wall Street skyrocketed to new all-time highs.
Could it be that investors are shedding some of their post-recession willies and finally preferring stocks to bonds?
"We think we may be near the end of the cautious investor. However, that is nowhere near for sure," says Linda Duessel of Federated Investors.
Ms. Duessel, the Pittsburgh money manager's senior strategist for equity income products, says Federated's recent survey of affluent investors and their advisers indicates investors are concerned about their low-yielding bond investments and are looking to stocks or considering combining stocks with bonds in their search for more generous returns that do not involve too much risk.
"They are dying for something that is a bond surrogate," Ms. Duessel says.
Nearly a quarter of the investors said they plan to invest more in stocks next year and only 8 percent will invest less in stocks over the same period. Those who plan to add stocks or stocks in combination with fixed income securities to their holdings outnumber those who plan on adding only bonds by nearly 4 to 1.
Among the advisers, 92 percent were confident or very confident that equities will provide solid returns for their clients while only 62 percent felt that way about bonds.
Figures from a mutual fund industry group support the contention that caution is no longer Job 1 for investors. The Investment Company Institute reports $18.1 billion flowed into equity mutual funds in July while $16.7 billion moved out of bond funds. A year ago, $25.1 billion moved into bonds funds while $9.3 billion was moving out of stock funds.
Ms. Duessel's conviction that the rotation to stocks has begun and that the 31-year-old bull market for bonds is ending comes after some impressive performances from the market's major indexes, which hit bottom in March 2009. The S&P 500 is up about 20 percent this year after rising 13 percent last year.
But the surge has not benefited from widespread support. Ms. Duessel says daily volume on the New York Stock Exchange is about half of what it was in 2006. While some of the trading has moved to other exchanges, there are clearly fewer investors trading fewer shares on a daily basis, she said.
That was one of the fears following the 2008 financial crisis: that investors burned by that downdraft and the tech bubble earlier in the decade would lose their appetite for stocks.
The survey indicates two factors are contributing to the shift to stocks: a slowly improving economy and a desire for returns that are a little more generous than those available from bonds.
Asked what they expect from the U.S. economy over the next 12 months, 56 percent of the investors and 68 percent of the advisers said they expect it to improve. Only 22 percent of the investors and 15 percent of the advisers think the economy will get worse.
The results are based on phone interviews conducted from June 20 to July 5 with about 1,000 investors who have at least $500,000 in investable assets, excluding their home and employer-based retirement plans. About 300 advisers were interviewed.
However much they are yearning for higher yield, trepidations about a variety of worries -- the budget impasse; bumping up against the federal debt limit; Syria; Europe; and that the Fed could botch the inevitable winding down of its massive stimulus -- are holding them back, according to Ms. Duessel. Federal fiscal and budget issues and pending changes to health care regulations were their biggest sources of worries about the economy. Europe and the confidence levels of U.S. consumers were the things that concerned them the least.
The daily parade of worries has made it harder to hear the Fed's loud and clear message: We're going to keep interest rates low until the economy is stronger and if you want sweeter returns from now until that happens, buy stocks.
Instead of jumping back into stocks, investors are moving gingerly into stocks that can generate some dividend income without exposing them to excessive stock market risk. Ms. Duessel said one of the best performing sectors Wednesday, when the Fed said it would not begin tapering its $85 billion monthly purchases just yet, was utilities, long considered to be a bond surrogate.
"There is such a very beautiful wall of worry out there, and that's why you don't jump from bonds into the S&P 500," she says, adding that it will take time for investors to realize the bull market for bonds is over and to react accordingly.
Survey results indicate investors are not as risk averse as their advisers thought. Ms. Duessel believes advisers who were afraid of losing clients because of losses caused by the financial crisis pursued conservative strategies that would preserve their clients' principal.
The survey indicates that advisers are charting a new course: Seventy-nine percent have recommended that clients devote a greater percentage of their portfolios to stocks and stock/bond combinations based on the improving economy.
Len Boselovic: email@example.com or 412-263-1941.