The fast stock market rally from its March lows returned the Nasdaq Composite to record highs, while the S & P 500 almost positively increased over the year, but trillions of cash remain on the sidelines.
According to a study conducted by LPL Financial, the sale of coronavirus led investors to run into money market funds, which far exceeded $ 4 trillion, exceeding the peak of the financial crisis. The flow to money markets pushed sector assets to the highest ever in history, reaching $ 4,672 trillion during the week of May 13, according to Refinitiv Lipper, and even the recent net outflow left more than 90% of this increase unchanged.
Money markets are not the only sign that investors are holding money outside stocks and bonds. Bank deposits also increased, according to Federal Reserve Bank of St. Louis,
Ryan Detrick, senior market strategist at LPL Financial, said the high cash level showed that many retail investors were frightened by the previous volatility and missed a recovery.
“Even after 45% of the refusals, returns or take-ups at S&P, we have not seen a really large part of the retail crowd return. … This once again shows that many people are still on the sidelines,” Detrick said.
When coronavirus spread from China to other countries and broke into financial markets, it caused the fastest of all 30% kickbacks in US stocks and liquidity problems in the debt market when investors tried to get cash.
“Basically, everything that was liquid and what you could sell was auctioned,” said Nela Richardson, investment strategist at Edward Jones.
Even after the Federal Reserve intervened to support credit markets and a sharp recovery in the stock market, this gap persists. In early June, assets managed by money market funds have grown by more than 28% since the beginning of the year, while equity and ETFs declined slightly, according to Bank of America. Fixed income funds generally also declined slightly, despite an influx of high-yield debt funds.
As the end of the second quarter approaches, fund managers can move on to reinvesting this money in stocks to achieve distribution targets. Richardson said she expects the market to take a technical step up as investors reverted to stocks or high-yield bonds for cash, especially at such low interest rates.
“Since real returns are almost negligible, and the Federal Reserve says it expects federal funds rates to remain close to zero until 2022, this only strengthens the incentive to return to stocks,” Richardson said.
David Waddell, CEO of Waddell & Associates, a development strategy company, said he believes that the effect of these rotations will be negligible, but the additional effect can be seen in a “decisive fall”.
“Those who are not well-distributed are likely to use any bureaucracy,” Waddell said.
However, according to Detrick, for retail investors who cashed money, market volatility may have scared them enough to prevent that money from appearing in stocks for a long time.
“It really can be a while. When you have bear markets like ours, it can shock investors, perhaps for years, ”Detrick said.