Investors are Hoarding Cash This Summer

Jonas Elmerraji, CMT

Stocks are in rally-mode again today – the S&P 500 (^GSPC) - is up more than 1.5% to start the week, teetering the big index on the verge of breakeven for 2020.

Think investors are feeling great about stocks given the recent rebound rally? Think again.

Investors – institutional and retail alike – aren’t putting money back into the market right now. Instead, they’re hoarding cash in record numbers:

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Money market funds’ net assets are going through the roof in 2020. And they’re staying at extreme levels despite the breakneck rebound in major stock indices.

Think of money market net assets as a proxy for cash-like safety assets in general.

In normal circumstances, we’d be pretty concerned to see stocks surging towards all-time highs at the exact same time cash is getting pulled away from equities and dumped into money markets at a rate that makes the 2008 safety trade look modest.

But these aren’t normal circumstances.

Right now, the stock market’s essentially a referendum on whether the Fed is willing to hold asset prices at any cost – and that’s been a good bet lately.

That doesn’t mean that what actual investors are doing is meaningless in 2020. For starters, it’s worth noticing the fact that retail and institutional market participants each began rotating into cash well before the COVID-19 crash hit the market in February 2020.

On the retail side, net money market funds actually surpassed their post-2008 peak before the crash, which is interesting. (Not surprisingly, institutions were slower to yank cash from the market.)

Near-term, at least, I think that the glut of cash on the sidelines is probably a net positive for stock prices in 2020.

Investors tend to chase performance. And given the fact that we have a market that ripped much higher thanks to a Fed backstop and record dry powder on and off Wall Street, the possibility for a rotation back into equities driving new highs in the second half of this year seems more than plausible – it’s a “heads I win, tails I don’t lose much” scenario.

Longer-term is where things get murky.

That’s good reason to buy what’s working in 2020.

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