Stock-To-Cash Ratios Suggest Very Little Buying Power for Investors at This Point
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As money market account balances soar, the mainstream media again proclaims,
No? Well, here it is directly from YahooFinance:
The surge in money markets since the has revived the age-old narrative that is set to come into the markets. However, they don’t tell you those funds have accumulated since 1974. Correctly, in the aftermath of crisis events, some of these assets rotate from to but not the degree commentators suggest.
Money Market Funds-Total Assets
Here is the problem with the “cash on the sidelines” reasoning: it is a complete myth.
The Myth Of Cash On The Sidelines
We have repeatedly discussed this myth, but it is worth repeating, particularly when the financial media begins to push the narrative to garner headlines.
There is a superficial, glib appeal to the idea. After all, lots of people hold money on deposit at the bank, and they could use that money to buy stocks, right? After all, the latest financial data from the Office of Financial Research shows more than $6.3 Trillion sitting in money market accounts.
Total Money Market Funds
So what’s to prevent some of that money
Simple. The fallacy of composition. This was the
Less Cash Than You Think
Furthermore, despite this very salient point, looking at the stock-to-cash ratios also suggests very little buying power for investors. As shown in the chart from Sentimentrader.com, as asset prices have escalated, so have individuals’ appetite to chase risk. The current equity to money market asset ratio, although down from its record, is still above all pre-financial crisis peaks.Equity/Money Market Asset Ratio
If we look specifically at retail investors, their cash levels have been at the lowest level since 2014 and are not far from record lows. At the same time, equity allocations are not far from the levels in 2007.AAII – Bonds, Cash, and Allocation Levels to Stocks
The same is valid with money market levels relative to the market capitalization of the S&P 500 index. The ratio is currently near its lowest since 1980, which suggests that even if the cash did come into the market, it would not move the needle much.
Money Market Funds To Market Capitalization Ratio
Mutual Fund Cash Level
So, if retail and professional investors are already primarily allocated to equity exposure, with very little who has all this cash?
So, Where Is All This Cash, Then?
To understand who is holding all the cash currently in money market funds, we can break the Office Of Financial Research data down by category.Money Market Funds By Type
There are a few things we need to consider about money market funds.
The list goes on, but you get the idea.
Furthermore, you will notice the bulk of the money is in Government Money Market funds. These particular types of money market funds often have much higher account minimums suggesting these funds are not retail investors.
Of course, since the ” one of the primary uses of corporate has been for share repurchases to boost earnings. As noted previously, as much as 40% of the bull market since 2012 can be attributed to share buybacks alone.
Share Buybacks 4-Week Change vs S&P 500
What Changes The Game
As noted above, the stock market is always a function of buyers and sellers, each negotiating to make a transaction. While there is a buyer for every seller, the question is always at
In the current bull market, few people are willing to sell, so buyers must keep bidding up prices to attract a seller to make a transaction. As long as this remains the case and exuberance exceeds logic, buyers will continue to pay higher prices to get into the positions they want to own.
Such is the very definition of the theory.
However, at some point, for whatever reason, this dynamic will change. Buyers will become more scarce as they refuse to pay a higher price. When sellers realize the change, there will be a rush to sell to a diminishing pool of buyers. Eventually, sellers begin to as buyers evaporate and prices plunge.
Sellers live higher. Buyers live lower.
What causes that change? No one knows.
But for now, we need to put the myth of to rest.
