Will a Great Rotation Make an Early Arrival? Is COVID-19 the Catalyst?

Sheaff Brock, great rotation, spinning top, bond holds shifting into stocks

Will a Great Rotation Make an Early Arrival? Is COVID-19 the Catalyst?

Months before COVID-19 had become the topic of everyday conversation, Marketwatch was talking about the arrival of a “Great Rotation” in 2020, anticipating the shifting of bond holdings into stocks.

Now, a half year later, Bank of America agrees with that prognosis: “The stars have aligned for more stock gains,” BOA observes, with equities being the most attractively valued in decades as compared to bonds.

For investors, the coming great rotation will be all about investment yield, explains Sheaff Brock Managing Director Dave Gilreath. Simply put, the current dividend yield on the S&P 500 is almost three times as much as the yield on 10-year Treasury bonds.

A bond’s current yield shows what interest rate a bond or other fixed-income investment is actually delivering, explains smartasset.com. It is an important factor in determining a bond’s profitability. Particularly for short-term investors, smartasset notes, current yield can be an incredibly useful measure of a bond’s value.

To the extent past history is a guide in this matter, Gilreath observes, the ratio of S&P dividend yields to 10-year Treasury yields can be an incredibly useful measure as well. As Matt Fox of Knowledia points out, every time the ratio was this high, equities went on to outperform bonds over the subsequent 12 months (by 31% on average!).

Is there a Coronavirus connection here? Sheaff Brock’s Gilreath believes the virus has served to speed up the bond-to-stock shift, with COVID-19-induced shutdowns causing the Fed to drive interest rates to near zero, shining a spotlight on the gap between bond and stock yields.

“Despite the relative attractiveness of stocks over bonds, the highly anticipated ‘Great Rotation’ of investors moving from bonds into stocks has yet to occur, according to fund flows,” Markets Insider observes. “Despite the drastic difference in S&P 500 yield and the 10-year rate, investors have not yet rotated into stocks from bonds… That suggests the potential for further upside.”

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