Market Preview: Hating the Rally

NEW YORK (TheStreet) -- One of the anomalies of the strong overall performance of stocks in 2012 has been skepticism seen in fund flows.

Consider this: even as the S&P 500 reclaimed 1400 last week, putting an exclamation point on the surge in equities since early June, the news came down that investors yanked a whopping $5.68 billion out of mutual funds investing in U.S. stocks during the week ended Aug. 1, according to the Investment Company Institute.

The outflow was the fourth in the past five weeks, bringing the total over that stretch to $12.44 billion vs. a paltry inflow of $95 million during the week ended July 18. Over the same five-week period, mutual funds investing in bonds saw total inflows of $25.02 billion. Year-to-date, U.S. stock funds have seen an exodus of more than $60 billion.

Brian Belski, chief investment strategist at BMO Capital Markets, weighed in on the situation early Monday, calling the latest melt-up in stocks "one of the most loathed market rallies in our collective careers" and saying investors may ultimately rue being so cautious.

"With near zero interest rates we believe investors are unknowingly putting their portfolios at risk under the façade of capital preservation," he wrote. "As a result, we would urge investors to take a more disciplined investment approach and recognize that certain historical and fundamental trends appear to favor stocks over bonds from a longer-term risk/reward perspective."

Dividend payers, of course, have been among the strongest equity performers for the past few years as the market has recovered from the financial crisis, but Belski thinks they deserve even more love now, given how little bonds are giving back these days.

"While most acknowledge that stocks yield more than bonds for only the second time since the 1950s, few fully appreciate the investment implications," he said. "For instance, while receiving minimal interest payments on their bond investments, investors are also significantly impacting their purchasing power since current bond yields are below longer-term inflation expectations. On the other hand, stocks have proven to be a reliable longer-term inflation hedge. In terms of relative performance, current bond prices in relation to stocks remain abnormally high from a historical perspective, levels which have traditionally been a precursor for significant stock outperformance."

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