Investors like Barry Knapp of Barclays Capital, Michael Purves of Weeden & Co. and Michael Gayed of Pension Partners have been anticipating the Great Rotation from bonds to stocks for months. Today we have evidence it may finally have begun.
Investors moved $15.5 billion into equity exchange-traded funds during March as they simultaneously withdrew $6.5 billion from bonds, according to data from XTF. This marks a clear reversal from January and February.
ConvergEx Group strategist Nick Colas breaks down the sectors that witnessed the largest March inflows: financials, technology and materials. He describes this as "the traditional recipe for Cyclical Recovery Soup."
The relevant question facing investors: Are they getting it right?
The answer is yes, and no. A recovering economy suggests investors are correct to bet on cyclical sectors, but some of the other cyclical sectors are forecast to grow faster, according to 12-month forward estimates tracked by Bloomberg. Specifically, energy and consumer services companies will likely grow earnings at least 14 percent, compared to 9-12 percent for the groups that saw the highest inflows.
We focus on energy for two reasons: it's forecast to grow earning fastest this year and it's cheapest among the 10 S&P 500 sectors. In addition, we note the iShares U.S. Energy ETF (IYE) has lagged the broader market during the past twelve months (+14.4 percent vs. +20.1 percent).
So energy is cheaper, growing faster and lagging the broad market. This combination spells opportunity.