Cash on the sidelines. There is $3.4 trillion parked in
money market funds right now earning virtually nothing, just
waiting to flood back into stocks. I'm certain you've heard
this in support of the notion that the stock rally has legs
(I even referred to it
back in August). Unfortunately for bulls, as
Goldman Sachs (NYSE: GS) strategist David
Kostin pointed out in a recent note to clients, investors are
misinterpreting this figure, and the argument is vastly
overstated.
What is true
There is undoubtedly a relationship between flows in
and out of equities and money market funds. For example, it's
no coincidence that money market fund assets peaked during
the same week in March which saw the S&P 500 hit a
12-year low. As investors sold equities, they parked the
proceeds in cash equivalents.
Where the argument goes wrong
Conversely, the bull argument goes, as
risk appetitereturns, investors will move back into
stocks, drawing down their money market accounts to do so. It
should be clear from the numbers in the table below that if
investors were to move
allof their cash from money market funds into
stocks, it would light a fire under the stock market.
Total Value (at Oct. 28, 2009)
Money Market Mutual Funds
$3.37 trillion
U.S. Equities (Proxy: Wilshire 5000 Total
Market Index)
$12.28 trillion
Money Market Funds as a % of Total U.S.
Equities Market Value
27%
Source: Investment Company
Institute and author's calculation, based on data from
Wilshire Associates.
However, there are limits to this reshuffling. Kostin
expects taxable money market fund assets to fall to $2
trillion in 2011 from $3 trillion at the end of October. Even
those numbers overstate the potential impact on stocks, since
part of these outflows will move into bond funds.
Looking back to 2003
Data from the Investment Company Institute, an industry
group, show that in 2003, the year stocks rebounded after a
debilitating three-year stretch, total net flows out of money
market funds totaled $258 billion dollars -- just 2% of the
current total capitalization of U.S. equity markets.
Finally, I'd add that risk appetite looks like
it's peaking, if it hasn't already peaked. The market's
rally has left the S&P 500 overpriced, and the valuations
of certain stocks look stretched:
Stock
Forward P/E* (Next 12 Months'
Earnings)
% Price Return From March 9 Market
Low*
Wynn Resorts (Nasdaq: WYNN)
91.1
261%
Amazon.com (Nasdaq: AMZN)
52.1
96%
Ford (NYSE: F) Continued... |