Stocks have rallied this year in an environment of pessimism

by Michael Tarsala

The stock market is near a five-year high, and still there is an argument to be made that pessimism prevails.

That’s mainly due to the popularity of bonds. They are so popular that bond yields have stayed below 2% for nearly six months, far below the average yield of 6.7% going back to 1962. The yield is so low that it’s causing problems for retirees that had planned on withdrawing about 4% a year from their bond investments to cover living expenses. A 4% yield used to be very easy to attain with Treasuries and muni bonds. Attaining that type of yield may now require investments in lower-grade issues.

What is shocking is that one-time equity king Fidelity Investments is now primarily a bond shop. Bond and money market assets now total $848.9 billion for the company, more than half of its $1.6 trillion in assets under management.

Several factors are at work. Fidelity stock funds have seen outflows of $3.6 billion so far this year. Yet it has not participated significantly in the rise of ETFs. Net inflows to U.S. ETFs were $131 billion through Sept. 24, according to BlackRock, the most since 2008.

The company also faces its own unique challenges, including competitors that have taken market share.

Yet one of the main reasons is simply due to bond popularity. Taxable bond funds have attracted $144.2 billion in net new flows this year, while investors pulled $40.4 billion from U.S. stock funds, according to the Investment Company Institute.

It begs a question: How well could the stock market do if there was a fundamental increase in the risk appetite for investors, and if stocks were once again favored over bonds?

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