The great rotation story goes like this:

The bond market is bulging at the seams, a bubble, essentially. Trillions sit there, earning nary a real return, simply because it’s supposed to be safe and you don’t fight the Fed. All the while stocks turn in 20+% gains on the year. Someday soon, bond investors will say enough’s enough and capitulate. They’ll exit the bond market and enter stocks, propelling them to yet greater heights.

The more I ponder the possibilities, the more I’m thinking that the much anticipated great rotation is a great maybe. Here’s the thing: at this juncture, folks can’t be holding bonds because they’re out to make money on their money. They’re holding bonds because they fear what tomorrow may bring. Therefore, the fact that they have to know (one would think) that rates can’t stay this low forever, in no way suggests that they’re on the verge of storming the stock market, as many bullish pundits seem to expect. In fact, if rates indeed spike based simply on an anticipated Fed move—as opposed to on robust economic data—I’d bet (figuratively-speaking) the stock market will most likely not be the destination of the proceeds collected by former bondholders. Nervous as ever—perhaps more so in that event—cash, in my estimation, would be their king.

So, does that mean stocks go the way of bonds (down)—when interest rates rise—if they aren’t the recipient of those proceeds? Decent valuations notwithstanding, that’s a distinct—and, at this juncture, welcome—possibility, particularly (but not exclusively) for the most interest rate sensitive sectors. I would not be a buyer of, for example, utilities and real estate stocks here.

So, do stocks have to go the way of bonds in a rising rate environment? Not at all (although I’d love to see a healthy correction, whatever the reason[s]). Rising interest rates (on the long-end of the curve) coinciding (if they do) with an improving economic outlook should bode well for the stock market in general—although I’d still avoid utilities and real estate stocks.

2014 is going to be a very interesting year.

Stay tuned…