Monday, December 09, 2019

Investor Cash Balances Elevated Or Maybe Not So Much

Over the course of the equity rally this year, periodically I have noted the significant level of outflows from equity mutual funds and ETFs. Commensurate with these outflows has been the significant inflows into bond mutual funds and ETFs and money market mutual funds. The Investment Company Institute (ICI) is one organization that tracks fund and ETF flows and for the week ending November 26, 2019, domestic equity funds and ETFs experienced an inflow of $609 million. This was the first domestic equity inflow since mid October. A slightly higher $631 million outflow occurred in international equity vehicles. The magnitude of the equity outflows is seen in the below chart showing cumulative equity outflows this year total $142.7 billion.

Money market mutual funds have been a beneficiary of the dollars coming out of equities. The first chart below is the absolute dollar amount invested in money market funds, $3.5 trillion. I have noted in the past this represents a potential tailwind for stocks once the money market dollars are reallocated to equities. The second chart shows the cash level as a percentage of the market value of corporate equities and this equals 10.6%. This is a level seen before the technology bubble in 2000 and the market peak going into the financial crisis in 2008.

An article appearing in Sunday's online Wall Street Journal, Investors Bail on Stock Market Rally, Fleeing Funds at Record Pace ($$), has picked up on this exodus from equities and move into cash. I have opined in the past that this cash could be a tailwind for equities. However, given the lower percentage allocation to cash, I would expect a portion of the cash to remain in other investments besides equities that investors view as safe havens. In short this seems like a good setup for the  equity market to climb the proverbial 'Wall of Worry.'

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