Greed is trumping fear: Investors give stocks another chance

NEW YORK -- Investors finally may be giving stocks another chance.

For years, many refused to buy into the hype, even as the stock market climbed to record after record. Wounds from the 2008 financial crisis still were too raw, and investors couldn't stomach the risk of watching their nest eggs drop by more than half for a second time.

Instead, they favored bonds, which have pumped out relatively steady and healthy returns for decades.

Enter Donald Trump.

Since his surprise victory in last month's presidential election, stock prices have soared higher, and bond prices have sunk on expectations faster economic growth and inflation may be on the way.

The change has been so seismic, investors poured a net $20.7 billion into U.S. stock funds last month. That's the biggest month for stock funds since 2014 and a turnaround from the nearly $76 billion that left those same funds in the 10 earlier months, according to Morningstar.

Ignore the dollars lost by funds run by stock-picking managers looking to beat the market, which have been unpopular in recent years, and U.S. stock index funds attracted a record $41.9 billion in November.

Bond funds, meanwhile, saw money head out the door. Investors pulled more than $13 billion from them, with the majority coming from those invested in bonds issued by city, state and other local governments.

The flow into stocks and out of bonds may grow only stronger, many fund managers said, once investors get year-end statements that show losses for bond funds. These funds are supposed to be the steadiest part of a portfolio, and many investors may be surprised to see they too can lose money.

The largest bond fund by assets, Vanguard's Total Bond Market Index fund, was down 3.9 percent in the fourth quarter through Wednesday, with almost all of the loss coming since the Nov. 8 election. It's still up 1.7 percent for 2016.

Of course, it's too early to tell whether this is a big reset in investors' psychology or another temporary blip. Analysts and fund managers have been predicting a "great rotation" from bonds into stocks for years, and it hasn't happened.

One big reason: Interest rates have remained low in recent years, and falling rates push up prices for existing bonds. Even after bonds lost money in the spring of 2013, when investor worries about a pullback in stimulus from the Federal Reserve led to a "taper tantrum," interest rates began falling again, and investors quickly returned to plowing dollars back into bond funds.

Plus, the worst-case loss for a high-quality bond fund remains much milder than the worst-case loss for a stock investment, which can go to zero, and that sturdiness always will attract some investors.

But if the trend of money flowing from bonds to stocks continues or accelerates, fund managers and analysts said it would provide a leg of support for the market, which has been climbing for years without much help from regular investors.

Such support would be particularly useful for a market some investors say is looking expensive after prices have risen much faster than corporate profits.

The Standard & Poor's 500 index is trading at 19.1 times its earnings per share over the last 12 months, above its average of 15.6 times over the last 15 years.

Among the reasons why fund managers say this shift from bonds to stocks may be more enduring:

• Bonds are struggling. Interest rates jumped following Trump's victory, and many analysts expect further gains in 2017.

The yield on the 10-year Treasury note rose above 2.60 percent this month from 1.86 percent on election day.

Many expect only modest returns from broad bond indexes next year. That would be a big downshift from previous years.

The largest bond fund has returned more than 5 percent in six of the last nine years.

The Federal Reserve surprised investors earlier this month when it indicated it could raise short-term rates three times in 2017, up from a prior forecast of two times.

Expectations for inflation also are on the upswing, which pushes up interest rates.

• Excitement about the economy is rising. If Trump and the Republican-held Congress can push through the corporate tax cuts they've discussed, it would mean an immediate rise in profits for companies, which would help their stock prices.

The job market also is continuing to improve, which should help the economy continue to grow.