Bond Funds Gaining Assets

Chart of the Week for November 13 - Nov 19, 2009

Since the sharp stock market declines of 2008 and early 2009, the stock market has rebounded with the S&P 500 Index rising nearly 60%. The recent rally has been impressive; however, the S&P 500 Index remains well below its all-time high. With the stock market rally, how have investors reacted with their money?

Investors usually are greedy when the stock market is going up and tend to bulk up on stock funds. On the other hand, investors usually are fearful when the stock market is going down and tend to move into money market funds and/or bond funds. This behavior is only a guideline and is not always true. For instance, since the stock market rally started in March 2009, investor cash has moved out of money market funds and has overwhelmingly moved to bond funds rather than stock funds. Money market funds experienced cash outflows of $437 billion from March to October 2009. Bond funds received $265 billion over the same time period, significantly outpacing the $20 billion received by stock funds.

Opinion varies as experts attempt to decipher this recent investor behavior. Some believe baby boomers may be transitioning their portfolios to bond funds as they near or begin retirement. Other experts think investors are reacting to what may be a prolonged bear market. A third opinion is investor behavior may represent a rational reassessment of portfolio risk in light of historical stock market declines. If investor fund flows are any indication of investor sentiment, bond funds are currently favored over stock and money market funds despite the recent positive performance of the stock market.

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