The day’s big event could be a Supreme Court ruling on the legality of many of the tariffs imposed by President Trump over the past year. Tens of billions raised might flow back to companies that paid them. Speaking of money flowing, private asset managers that want a piece of Americans’ retirement savings have egg on their faces after industry stalwart Blue Owl had to liquidate assets to repay clients who want out. And stocks look poised to recover some of Thursday’s losses.
Oh Really?
You lose 90% of your body heat through your head.
Lightning never strikes the same spot twice.
Cash on the sidelines can push stocks higher.
With apologies to your mom, and deep respect for the Empire State Building, there are plenty of things we’re told that just aren’t so. The myth that there’s a bunch of dry powder poised to surge into the market is the one most likely to cost you.
Sure, there’s never been more of it parked in money-market mutual funds—about $7.7 trillion recently between companies and households. The next time a pundit cites that as a positive factor, though, ask them what happens with cash when it runs onto the metaphorical field?
If Peter has $1,000 in his money-market fund and decides to buy four shares of IBM with it, someone else has to feel like selling. Say it’s Paul, who now has that $1,000. The same amount of money is “on the sidelines.” It could go into a checking account instead—there’s cash in those, too—but no net money “went into” the market.
Not every pundit means it literally. Could “cash on the sidelines” affect things at the margin? A stock’s price moves on the general desire to buy rather than sell, so it sounds logical that savers with lots of readily investable cash could create upward pressure.
But Chris Watling, chief market strategist at Longview Economics, says there’s no evidence of the absolute level of money-market mutual fund assets having a consistent effect. Also, $7.7 trillion ain’t what it used to be: Compared with the combined market capitalization of stocks on the New York Stock Exchange and Nasdaq, he points out that it’s on the low side, at about 12%.
That ratio got near 60% during the global financial crisis and down to barely 10% in 2018. The reasons: In the crisis, stocks were cheap but investors wanted ready cash. In 2018, by contrast, stocks had been booming and savers were basically earning nothing in money-market funds. Their cash found slightly greener pastures in things like long-term bonds or bank deposits.
That brings up an actual connection between savers’ cash and their fondness for stocks. When short-term interest rates are artificially low, conservative people might choose to take slightly more risk and lock in higher rates through bond funds. Others allocate more to stocks. Those who already own a lot of shares might choose riskier ones with more-distant and less-certain payoffs—speculative, unprofitable companies.
That explains investors’ obsession with the Federal Reserve and what its next moves might be. Overthinking short-term rates might not be so smart, though, since stocks are a long-term asset. It’s still PhD-level analysis compared with counting “money on the sidelines.”
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