The “Great Rotation” is going to make a comeback.
Specifically, Bank of America’s Chief Equity Strategist Michael Hartnett sees money rotating out of bonds and into stocks.
Following Wednesday’s latest monetary policy announcement from the Federal Reserve, Hartnett identified a few themes coming back to the market.
With the Fed no longer injecting liquidity into the market with a quantitative easing program, and interest rates eventually rising, Hartnett sees a transition to an environment of “Higher Growth and Less Liquidity” in 2015.
One these themes? The Great Rotation.
The “Great Rotation” is a market meme that really took hold in 2013, and the central idea is that that money was going to rotate out of bonds and into stocks.
Hartnett says that the “push” from bonds and the “pull” from stocks will become stronger in 2015, as markets adjust to an environment of higher rates and lower liquidity.
Some other trends Hartnett sees emerging are:
- Pro-risk asset allocation: bullish dollar, bullish real estate, bearish rates, bullish stocks, bearish commodities
- Lower excess returns: the end of excess liquidity means the end of excess returns (big returns of 2009-2013 were due to zero rates not strong growth)
- Increased exposure to the “ZIRP losers”: the US dollar, Banks & Volatility are practically the only things that have not gone up since the Lehman bankruptcy 6 years ago
Hartnett also wrote that following the Fed’s latest monetary policy announcement and Fed Chair Janet Yellen’s press conference on Wednesday,“We believe the interest rates genie is out of the bottle. Put simply: 2015 will be the first year since 2006 that the US central bank hikes rates.”
And while there was an outflow from bonds during the “taper tantrum” in the spring of 2013 — when bond yields spikes after then-Fed Chairman Ben Bernanke hinted that the Fed could reduce its QE program — bonds have resumed their rally this year.
Hartnett was the first strategist on Wall Street to popularise the idea of the “Great Rotation,” which has disappeared from Wall Street’s lexicon in 2014.
So keep an eye out for this trade — or at least this idea — to make a comeback.
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