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Ready to Boost Stocks: Investors' Multitrillion Cash Hoard

The Wall Street Journal. logo The Wall Street Journal. 11/5/2019 Ira Iosebashvili
© Photo Illustration by Emil Lendof/WSJ; Photos: iStock

As stocks cruise to fresh highs, investors’ $3.4 trillion pile of cash is reassuring some that the decadelong bull market can push still higher.

Assets in money-market funds have grown by $1 trillion over the last three years to their highest level in around a decade, according to Lipper data. A variety of factors are fueling the flows, from higher money-market rates to concerns over the health of the 10-year economic expansion and an aging bull market.

Yet some analysts say the heap of cash shows that investors haven’t grown excessively exuberant despite markets’ double-digit gains this year, and have plenty of money available to buy when lower prices prevail. That is a comforting message to those concerned about an economic slowdown yet wary of betting against a market that has punished doubters during its 10-year run.

“Cash always makes me feel good, both having it and seeing it on the sidelines,” said Michael Farr, president of the money-management firm Farr, Miller & Washington, which is holding twice as much cash as usual. “It keeps things a little bit safer.”

Investors said the rising cash reserves reflect several worries that have become prevalent among money managers over recent months, as flare-ups in the trade war with China and uneven U.S. data sparked bouts of volatility in markets.

Many are concerned that stock prices have climbed to unsustainable levels relative to companies’ earnings at a time when the U.S. economy is slowing. A popular metric pioneered by Nobel Prize-winning economist Robert Shiller shows that valuations remain near two-decade highs, though they have retreated from their heights of early 2018.

Sandy Villere, portfolio manager at the $2 billion Villere Balanced Fund, is keeping 17% of his portfolio as cash, up from the usual 10%. Mr. Villere believes valuations have become stretched and prefers to wait for another dip before jumping in again.

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“We don’t have to swing at every pitch,” said Mr. Villere, who added two new stockholdings to his portfolio when markets slid last December. “Right now, we’re struggling to find high quality at reasonable prices.”

Rising yields in money markets have been another key factor. Money-market funds through October offered an average annual return of around 1.6% this year, up from 0.02% in 2011, according to Crane Data. Sweep accounts at brokerages, the main reservoir where these firms hold clients’ cash, paid about 0.2% on average through September.

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When interest rates fell in the years after the financial crisis, bank deposits gained market share from money-market funds because the gap between the yields on both had narrowed so much, said Peter Crane, president and publisher of Crane Data.

Money-market rates rose in response to the Fed’s nine interest rate increases since 2015 and have declined in recent months to reflect the central bank’s rate reductions this year.

Higher rates, together with a comparatively high degree of liquidity, has increased money markets’ allure for investors looking to park their cash for a comparatively short period.

Some fund managers have warned investors against being overly cautious in a market that has shrugged off a range of economic and geopolitical worries over the past decade and continues to edge higher. A UBS Global Wealth Management survey of 4,600 wealthy entrepreneurs and investors showed that more than a third raised their cash allocations in the past quarter in response to flaring trade worries.

In total, cash holdings rose a percentage point to 27% of survey respondents’ portfolios at the end of the third quarter from the previous quarter, even as a growing number said they were increasingly optimistic on the global economy and stock performance. The cash allocation is much higher than the percentage recommended by the firm.

“There is a dichotomy in sentiment—investors are holding large cash balances in a wait-and-see mode, even though nearly 50% anticipate higher stock market returns in the next six months,” said Paula Polito, UBS Global Wealth Management’s client strategy officer, in a recent report.

The difference between combined flows into cash and bond funds relative to stocks over the past year is the greatest since 2012, after adjusting for assets under management, according to Goldman Sachs.

In a historical context, however, stock allocations remain large. The firm estimates that investors have about 12% of their portfolios in cash, ranking in just the fifth percentile going back to 1990. By contrast, stock allocations are at roughly 44%—equivalent to the 81st percentile going back the past three decades.

Analysts at Bank of America Merrill Lynch, meanwhile, see the cash pile as an indication that markets have plenty of fuel for more gains.

The bank’s proprietary Cash Rule Indicator, which gives a buy signal on stocks when investors’ cash balances are above their long-term averages, has been in bullish territory for the last 20 months. Fund managers polled in the bank’s latest survey said they are holding an average of 5% of their portfolios in cash. That compares with a 10-year average of 4.6%.

“We take it as an incredibly positive sign on a contrarian basis,” said Jared Woodard, investment strategist at the bank.


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