Investors Are Sitting on the Biggest Pile of Cash Ever
Amid head-spinning economic uncertainty and stock-market volatility, many investors have rushed into money-market funds
Investors have rarely been this flush with cash.
Grappling with the most economic uncertainty in decades and a head-spinning stretch of volatility in the U.S. stock market, many investors have rushed into money-market funds. Assets in the funds recently swelled to about $4.6 trillion, the highest level on record, according to data from Refinitiv Lipper going back to 1992.
It is a “pantry-loading and survival” mentality, said Peter Crane, founder of Crane Data, which tracks the industry. “It’s blown the lid off the previous record high.”
Assets in money-market funds are one, but not the only, measure of cash holdings, and investors have socked away cash in other places, too. Other measures, like bank deposits, are also at a high.
Analysts attribute the flight to cash to the coronavirus pandemic, which spurred a rush out of stocks, bonds and commodities. Meanwhile, stimulus checks sent to millions of Americans as part of the economic rescue package helped add to the heap.
It is the latest perplexing signal in markets, coming as many investors are already struggling to reconcile the economic downturn stemming from the coronavirus pandemic with the simultaneous, staggering rally that has pulled major U.S. stock indexes up more than 35% off their lows of late March.
Few can agree on what the giant pile of cash means for markets. Many investors, nervous about the economic downturn, are questioning if stocks have soared too far, too fast, and have chosen the safety of cash over investing in the market. Others are keeping cash on the sidelines, ready to deploy when they spot an attractive buying opportunity.
Anxiety surrounding the market’s run-up has been on display recently, with the S&P 500 plunging 5.9% on Thursday—its biggest drop since March—before swinging wildly on Friday and Monday. The index has surged 40% since late March and is off just 3.3% for the year.
Yet despite the advance, overall stock positioning among investors remains among the lowest levels of the past decade, according to data from Deutsche Bank. New individual investors jumped into the stock market during the recent selloff, while bigger institutional investors only recently started adding to stock positions, a team of Deutsche Bank strategists led by Parag Thatte said in a June 5 research note.
John Cunnison, chief investment officer at investment firm Baker Boyer, said he moved some of his portfolio into cash earlier this year when volatility first started creeping into markets—marking the first time in at least a decade that he hasn’t been fully invested in stocks or other assets.
He isn’t alone. Assets in money-market funds have grown by about $1 trillion this year, pushing assets in these funds above the prior high of roughly $3.8 trillion reached during the last financial crisis.
Like many other investors, Mr. Cunnison has been struggling to reconcile the divergences between the deteriorating economy and the improving stock market.
“It does justify some higher level of caution and resilience in portfolios than you otherwise would have,” Mr. Cunnison said. “We’re still comfortable with a slightly higher level of cash.”
Jeremy Grantham of GMO LLC, who earned acclaim with his calls ahead of Wall Street busts in 2000 and 2008, wrote in a quarterly letter that stock-market valuations are among the highest they have been historically, while the U.S. economy is about as abysmal as it has been.
“Everyone can see and feel that this is different and can sense the bizarre nature of the market response: we are in the top 10% of historical price earnings ratio for the S&P on prior earnings and simultaneously are in the worst 10% of economic situations,” Mr. Grantham wrote in his letter to investors.
The U.S. officially entered a recession in February, putting an end to the historic 128-month expansion. Meanwhile, the S&P 500 is trading at 21.9 times its expected earnings, putting its forward price-to-earnings ratio near levels seen during the dot-com bubble.
Mr. Cunnison said he put some money back into the market in mid-May and would like to gradually wade back into stocks, especially if share prices drop further. Some market watchers interpret the cautious positioning by investors like Mr. Cunnison as a positive sign that the stock market has room to run.
“If this rally continues…this is something to fuel a continued rise in U.S. equities,” said Stephen Suttmeier, chief equity technical strategist at Bank of America, of the positioning.
Other positioning data shows traders have been pessimistic about the recent rally. As stocks rebounded, leveraged funds like hedge funds have accumulated the most bearish position on S&P 500 futures since 2016, according to Commodity Futures Trading Commission data.
Some investors are also sitting on the sidelines of the bond market.
Chris Zaccarelli, chief investment officer of wealth-management firm Independent Advisor Alliance, said he has held more of his portfolio in cash than usual. When scanning the market for high-yield and investment-grade corporate bonds, he says, he hasn’t spotted enough appealing opportunities to invest. Keeping money in cash has benefited him, shielding him from the gyrations in the bond market.
“It actually protected us” this year, Mr. Zaccarelli said.