The year started off with a lot of talk about a “great rotation” of assets out of bonds and into stocks. The theory was that this shift in everyone’s portfolios would cause enormous upward pressure in the stock markets.
However, there has been little evidence of a great rotation going on.
Meanwhile, stocks have managed to rally to all-time highs.
In a new note titled “The Invisible Buyers,” Citi’s Tobias Levkovich offers an explanation. Among other things, he makes one important clarification:
The stock market is not a zero-sum game. There’s a mistaken tendency to think that a dollar that leaves the equity market translates into a dollar less in the stock market. Equity prices often move on a change in perception typically caused by an upside earnings surprise, a takeover announcement, lowered guidance, etc., such that double digit changes can occur without a single dollar even changing hands at that moment. Hence, while flows matter, they aren’t everything one should consider. Other facets can be as crucial to the understanding of likely stock price direction including economic trends, investor sentiment, valuation and the attraction of competing assets.
This is important because there seems to be a misunderstanding that people cannot be participating in the rally unless they are constantly buying and selling stock.
In fact, investors sitting in stocks without trading actually experience the paper fluctuations with everyone else along with the market.
Even if the entire rally since the March 2009 bottom was generated by two people exchanging a handful of shares, all of the holders of the outstanding shares would’ve benefitted.