According to Mark Hulbert, the cash on the sidelines is a myth.
What appears to be a bullish argument for the stock market turns out to be a compelling case for why it’s in trouble.
I’m referring to the notion that a huge amount of cash is sitting “on the sidelines,” as investment professionals say. And it’s just ready to propel the market higher once Nervous Nellie investors finally decide that this bull market is for real.
According to Hulbert’s opinion piece, “A bullish argument for stocks turns out to be wrong” (MarketWatch, May 1, 2015), which cites noted market research maven, Ned Davis and Ned Davis Research, that cash just isn’t there.
What’s wrong with this picture?
Nothing, if you happen to be a fan of Picasso and Cubist art. Similarly, if you are bearish on the market, Hulbert’s piece is a validation of that position. Importantly, what is missing in that picture is a broader definition of what many investors consider “cash”, “safety” and “liquidity” … BONDS.
Mutual fund investment flow data, provides a better picture of what regular people are doing with that “safe”, “liquid” money. This link to Data.OKFN.com and their distillation of data provided by the Investment Company Institute is a real eye-opener [“US Investor Flow of Funds Into Investment Classes (Bonds, Equities Etc.)”] . It shows since 2007, there has been a fairly consistent flow of funds into bond/fixed-income funds and a liquidation of equity funds.
Another example of this so-called preference for safety and some yield (cash yielding nothing) can be found in the U.S. Treasury 10-year note. In early February of this year that note traded at a low yield or 1.6%. If you had been so unfortunate as to purchase $10,000 worth of that note with that coupon at that price, as of May 1, 2015, your investment would be worth only $9540. The current yield available on the 10-year had moved up to 2.12%. To provide a competitive yield to maturity your 1.6% note got marked down $460. Now if you don’t mind waiting, you’ll get your 10 grand back for sure in ten years. The picture only gets worse if rates on the 10-year eventually go back to a more-normal three or four percent … a pretty good bet over time.
But, I digress.
So, where is all that sideline cash? It’s in BONDS!
(Safety/liquidity investors may end up regretting that positioning)
I’m not sure why Hulbert wrote this piece, as I’m sure he is aware of the (assumed near-cash) assets swamping bonds and bond funds. Because CASH in a zero interest rate environment is not the only metric we should be using as a measure of potential ‘dry powder’ to fuel the market moving higher. My guess is that Hulbert knows that the negative headline will get him more page count. I have discovered this in kortsessions. My most negative headers get the most hits. It is a sad commentary.
What do you think?
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