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When Do Investors Rush Into Cash?

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You may have read about investors moving into cash recently. 

In fact, cash holdings in institutional money market funds rose 105% to $4.7 trillion dollars between February 24, the beginning of 2020’s bear market, and the beginning of May.

Investors move into cash in three types of scenarios:

First, they move into safe treasury bonds, but also cash, as part of a broader move into safe assets and out of stocks.

Second, they have no confidence in the price of any asset, making preservation of their capital the most attractive allocation.

Or third, investors are cautious about the future and while they’re buying some stocks, they're waiting for stocks to fall to levels attractive for even more buying.

In late February, we saw the first scenario. The coronavirus was clearly about to throw the U.S. economy into a recession. Stocks became unattractive and the market knew the Federal Reserve would lower interest rates, making treasury bonds attractive at their interest rates then. Investors bought up treasuries but also moved into cash so they could have easy access to stocks after they fell.

For over a week in March, we saw the second scenario. Investors kept hoarding cash, but the price of treasuries had risen far enough that it couldn’t rise anymore from there. But stock prices weren’t done falling either. So the best place for investors’ money: Cash.

In April, we saw the third scenario. Cash holdings kept rising, while treasury prices were range-bound and stock prices rose considerably. Investors used some of that cash they’d raised to buy some stocks at lower prices, but they also maintained a strong cash position because stocks are still highly vulnerable.

To see how this impacts your investment decision making, see the quick video above. 

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