Key Takeaway: The bulls have some heavy lifting as bears pack on the pounds. Yes, last week was impressive, as was the summer rally. But questions about sustainability remain. After all, in the wake of the greatest bull market rally in history in 2020/2021, it shouldn’t be surprising to get the most significant bear market rally ever in 2022. That leaves stocks with an uphill battle in the face of persistent macro headwinds (rising interest rates, dwindling growth expectations, and unrelenting US dollar strength). While pessimism has reached levels indicating opportunity and decreased risk for longs, downside risks remain. An increase in selling pressure could excite the bear camp, prompting a more complete unwind in equity exposure and accelerating interest in bonds even if yields continue to move higher.
Sentiment Report Chart of the Week: Bonds Unloved For Long Enough?
Quarterly data from the Federal Reserve shows investors are getting more interested in bonds, albeit from extremely low levels. Coming into this year, household exposure to bonds (as a percent of total allocation) was around 16%, a 50-year low. At the end of the second quarter, exposure had risen to nearly 18%. Equity exposure coming into this year was at an all-time high above 62% and has since dropped to 56%. Some of the shift in exposure this year reflects price volatility though in inflationary environments, stocks and bonds move in the same direction. What these shifts reveal is active rotation from stocks to bonds. Even after these moves, stocks are historically over-owned and bonds (and cash) are historically under-owned. With the tailwinds that fueled outsized gains in equities over the past decade fading, this could very well be the beginning of a generational shift away from equities and toward bonds.
