Volatility across capital markets is often a sign of cash exiting or entering a specific asset class, which can be defined as exposure to stocks, bonds, commodities, or any other investment that carries a reasonable liquidity profile. Measuring the level of cash that investors are holding has often provided an actionable perspective as to the potential medium-term outlook for capital markets. It has also provided an understanding of why cash levels may have risen (or declined) relative to macroeconomic and geopolitical events. The cash analysis conversation becomes paramount in today’s environment because U.S. investors are currently keeping near record levels of cash (as measured by money market funds). We believe this to be an immense benefit for those investors willing to sustain, or increase, their level of equity market participation.
The COVID induced bear market of 2020 was clearly a catalyst for short-term fear, and we can observe the immediate impact that resulted in an increase in aggregate cash levels. What’s most interesting, however, is that the notion of short-term fear remained highly intact for most investors post-COVID, and likely resulted in many investors foregoing sizeable equity market gains in 2021. As we look ahead to the next 12-24 months, we cannot make predictions on the extent of market movements, but we feel confident in saying that the current record high cash levels are not likely to remain as is. The cash may be deployed across numerous asset classes, and stocks stand to likely benefit the most (in our view). We believe this not only because stocks have historically provided the best protection against US inflation, but because the current backdrop of consumers remains fiscally healthy and able to drive responsible demand via sustained corporate margins and healthy earnings. This is also a reason why we believe the likelihood of a recession over the next 12-months remains remarkably low, despite the on-going geopolitical tensions in Ukraine.
We believe the information provided in the chart below represents a contrarian indicator the likes of which we haven’t observed since the COVID bear market lows of March 2020. Investors will deploy cash at some point in the future and missing that inflection point may result in a detrimental outcome to your investment portfolio.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Source: Bloomberg. Investment Company Institute. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Advice offered through CX Institutional, a registered investment advisor.