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Article Review: Cash On The Sidelines

The most common bullish argument lately is based on the fact that nominal money market balances have gone parabolic in the past couple of years as the Fed raised interest rates. The obvious reason is that what investment pundits commonly call "cash" aka. corporate money markets and t-bills are now yielding more than both stocks AND Treasury bonds. In other words, the safest investment has the highest yield. Of course if the Fed starts aggressively cutting rates, then that rate of return will quickly fall. Which is why the yield curve is inverted, because investors are betting that over the long-term bonds will garner a higher return once the Fed begins easing. Especially when including potential for capital gains, which is non-existent for money market funds and very substantial for T-bonds.


Just today, yet another article today in the Wall Street Journal citing this "bullish factor". So, it's time for a reality check:



"Wall Street wants your money off the sidelines.

Rising interest rates drew trillions of dollars into money-market funds and other cash-like investments in the past two years, with more than $8.8 trillion parked in money funds and CDs as of the third quarter of 2023. Investors are optimistic that with rates poised to fall, people will redirect that money and fuel markets’ next leg higher"


FR: This article has a lot of anecdotal stories, but from an investment standpoint it's nearly useless. So, I looked around for other articles on this topic and I found this recent one from Morningstar/Marketwatch:


"Arguing that 'cash on the sidelines' is bullish for stocks is 'propaganda,' says Ned Davis strategist"


"Has anybody bothered to check the record?" Kalish asked, in a Thursday client note. "We have and here's what we found."


Of note, all three past periods of declines coincided with Federal Reserve moves to ease monetary policy while bolstering the economy, motivating investors to move money out of cash into higher-yielding assets


Importantly, these past declines in money-market assets came after big bear-market moves in equities that enticed investors back into stocks and out of cash"



FR: So, what it takes to move cash off the sidelines is a recession AND a bear market collapse.


I decided to check these facts for myself so I downloaded the Retail Money Market data from FRED and then I divided it by CPI to make it comparable over time, going back 40 years to 1985.


Here is what I found:


Inflation-adjusted money markets ROSE in correlation to stocks and then fell when stocks fell. And inflation-adjusted money market balances are now the highest since Y2K.


So, in summary what is deemed to be a bullish factor is in fact a bearish factor. But, when people are not checking facts, they are free to believe whatever they want.






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