Wednesday, October 08, 2008

Are Money Market Cash Levels Signaling A Market Bottom?

The below chart notes money market cash as a percentage of all mutual fund assets is at elevated levels. The data is through June and I have no doubt cash levels are at even higher levels today.

(click chart for larger image)

cash levels, stock market, bear market headlines. January 1998 - June 2008Fidelity's Market Analysis, Research and Education Group notes:
  • This flight to safer investments recalls similar investor behavior in 2001-02, when a bear market coincided with sharp increases in flows to money market funds.
  • For example, in October 2002, money fund assets stood near an all-time peak of nearly 35% of all mutual fund assets (reached in January 2003). This cash surge coincided with the low in the S&P 500 and a spike in “bear” headlines.
  • Although a new bull market began in October ‘02, investors kept an above average level of cash until February ‘04—meaning in the aggregate, investors overallocated to cash during a 15-month period when stocks rose more than 30%.
  • As a result, some investors who kept long-term capital tied up in cash likely missed out on considerable gains.
According to Fidelity, the bottom line is to stay invested if your cash levels are at acceptable levels:
  • Historically, investors have increased cash positions during bear markets but have been slow to reallocate to stocks. Sudden corrections—and sudden rallies—have been a normal part of the stock market over time, and attempting to move in and out of it can be a costly endeavor.


Anonymous said...

I know I am not alone in hoping so!

Best Wishes,

Anonymous said...

Don't think this chart makes a whole lot of sense. The 2001 "bear market" is drastically different from the 2008 "bear market", as this is far more broad-based than the tech-centric crash of 2001. Run the above chart using the Nasdaq index, and you'd conclude that mutual funds that put their money into cash are absolute geniuses. I don't know if this is a bottom or not, but I feel zero shame/concern about being almost entirely in cash right now. (And not just the American dollar cash, either.)