The smart money has moved away from stocks. So is the era of stock investing over?
It's too early to tell, but one thing is certain: "Money goes where it is treated best, and that hasn't been in stocks," says Wade Slome, who advises high net-worth investors and runs a hedge fund at his firm, Sidoxia Capital Management in Newport Beach, California.
The overall stock market is down over the past decade, while the price of gold has more than quadrupled and corporate bond returns have doubled. Couple that with the slow economy, and hedge fund managers and institutional investors continue to shift money away from stocks to investments they think will be safer.
An estimated $170 billion has been put in bond funds this year, while $35 billion has been pulled from stock funds, according to the Investment Company Institute, a trade group for the mutual fund industry.
So much for buy and hold.
Analysts at Bespoke Investment Group say we're in a "drive-by market." Their take: Stock investors aren't anticipating or analyzing anything. They just react to the news of the day and then move on to the next thing.
Three months ago, the survival of European banks and economies was front and center. Now, it's barely mentioned. Same goes for the "flash crash" in May. News of strong corporate earnings one day can drive the market sharply higher, but a weak earnings report the next can send prices plunging.
"Investors look at what is in front of them at that minute, and that's it," says Paul Hickey, one of the founders of the investment research firm.
The volatility begets more volatility, which further unnerves investors who have been punished by losses over the last decade. The total return, including dividend, for the benchmark Standard & Poor's 500 index is down about 11 percent since August 2000, according to Bespoke.
That means an investor who put in $10,000 in an S&P index fund 10 years ago and held it now has less than $9,000 to show for it.
Billionaire investor George Soros is one of those who bolted out of stocks in the second quarter. His Soros Fund Management reduced its stock holdings by about 40 percent to $5.1 billion from April through June, according to a quarterly report filed Aug. 17 with U.S. securities regulators. The fund sold 93 percent of its stake in Pfizer and 98 percent of its stake in Wal-Mart during the quarter.
The fund's biggest holding is an exchange-traded fund in gold-related stocks. It represents 13 percent of its stock portfolio. The quarterly report does not detail the fund's holdings outside of stocks, and the fund declined to comment on its investments.
Other big-name investors with large positions in gold ETFs include John Paulson, who was made famous for his successful bet that the subprime mortgage market would blow up.
They are sticking with gold even though prices for the precious metal are up 9 percent this year to more than $1,200 an ounce. That's four times the $300 price of an ounce of gold in 2000.
There has been an equally bullish move into government and corporate bonds. The Federal Reserve has pushed down interest rates to almost zero to stimulate the economy. That has spurred a rally in Treasury bonds and notes. The benchmark 10-year Treasury yield is down to 2.6 percent, its lowest level since the height of the financial crisis in 2009. Prices and yields move in the opposite direction.
Lower rates should help companies because they make it cheaper to borrow money and allow them to refinance their existing debt. Corporate profits then go up, leaving more money to spend on expansion or workers.
Instead, investors are putting money into corporate bonds, even those that offer little guaranteed return. IBM was able to raise $1.5 billion by selling 3-year notes that pay a mere 1 percent in interest. That was only 0.30 percentage points more than the yield on comparable U.S. Treasurys.
Johnson & Johnson sold 10-year bonds this month with a 2.95 percent yield, even though it pays a dividend equal to about 3.7 percent of its stock price.
That means an investor who buys $10,000 in J&J bonds gets back $295 annually for 10 years, plus the principal. If that investor bought 166 shares of J&J stock at about $60 a share now and held it for a decade, the annual payout would be $360 a year, plus any price appreciation in the stock and increases in dividends. J&J has increased its dividend for 48 consecutive years.
Junk bonds are also attracting investors. They are being issued by companies at a record clip. Junk bonds are rated lower than other corporate debt because they have a higher probability of default. Investors are compensated for that risk with higher yields, which currently average around 9 percent.
Institutional investors like pension funds that are willing to take above-average risks to get above-average returns, says Ed Yardeni, who runs his own investment and economics consulting firm.
"Investors are fed up with stocks," Yardeni says. "But they are still diversified: Half their portfolio is in gold and half in bonds."
Of course, investing in bonds and gold aren't risk-free. Far from it. The dramatic rallies in both have some on Wall Street saying that bonds and gold could be nearing a bubble that's about to pop.
By taking those positions, investors are hedging their bets about what's to come with the economy. Gold is considered a protector against inflation, and bonds are good to hold in times of deflation.
As for stocks, they're getting the short shrift they deserve.