Chart of the week – Quarantined Cash
Stocks have been on fire from the March 23 low, climbing 30%+ and seemingly defying most fundamental logic. There have been minor pullbacks along the way, but for the most part it has been among the sharpest snapbacks the market has ever experienced. For perspective back in 2008-2009, it took about 7 months for the VIX to finally drop below 30% from its late 2008 peak above 80%. This time around it took 7 weeks.
How do investors feel about the roller coast ride? Maybe not so great. Sentiment can be tough to judge sometimes. At Topdown Charts, we take weekly surveys from the Twittersphere to get our own gauge (and checking out the surveys of many others like Sentix, AAII and so-on). We can go beyond that though by reviewing where people are actually putting their money and by reviewing longer-term sentiment data trends.
We chart vast amounts of economic data to help form our global macro and asset class views. Where people are putting their cash is one of them. Below are charts from the latest weekly report of money market holdings in dollars and the AAII sentiment survey with ICI Implied Allocations.
We talked about cash allocations back in January 2019 in one of the year’s 10 charts to watch. Data showed that investor cash positioning was near record/cycle lows going into 2018, and nearly the same aggressive positioning was seen in early 2020.
First up – money market holdings. The retail and institutional money market figures are a bit deceiving in that you may see them and think, “wow – all-time highs! Bearish!”, but hold your horses. Of course there are more assets in general today versus 2008, so there is a bit of ‘denominator blindness’ going on.
Nevertheless, cash apparently is king right now. Unfortunately our king is also losing out to inflation with a Fed Funds target rate near zero and core CPI & PCE deflator data running around 1.5%-2.0%. But increased cash holdings also makes intuitive sense since job security is down and volatility is up.
A key piece of personal finance risk management is to have a rainy-day fund – and there has been no rainier a time than this. From an investing point-of-view, when volatility ticks up, position-sizing often gets smaller – which may also mean increased cash holdings to buffer volatility.
The American Association of Individual Investors (AAII) has performed a weekly survey since 1987. Investors are asked what direction they think the stock market will be in six months. Most recently for the week ending May 6, 24% are bullish, 24% are neutral, and 53% are bearish. The historical average is 38% bullish, 31.5% neutral, and 30.5% bearish. They survey also dives into investor allocations, which is plotted on our chart.
So folks are rather bearish at the moment despite (because of?) the historic bounce US stocks have produced. AAII even noted that overall pessimism is at 7-year highs. Perhaps it makes sense from an economic point of view given the horrific data points released since March. And more of them are obviously on the way.
One more - the Investment Company Institute (ICI) provides AUM data across the fund industry, and from this we calculate "market share" of money market funds data. This figure gives us better clues to portfolio allocations. Interestingly, the ICI implied allocation about matches with the AAII sentiment survey data – that doesn’t always happen. Dare we say there indeed is ‘cash on the sidelines’ or even the dreaded ‘most hated rally in years’?
Despite the “TINA” narrative, cash is still a position. And investors have used it as such – to the tune of the highest allocation since the 2011 European debt crisis. It’s important to keep things in perspective though. Cash catapulted in 2008 to near 45% while the implied level is just shy of 25% at the peak so far in this equity market volatility.
Here’s the point – like we noted in early 2019, this will continue to be a chart to watch through the end of this year. Bull markets are often born on poor sentiment, and we certainly have such sentiment today. A swift stock market swoon followed by almost just as fast of a stock surge will yield interesting sentiment changes among investors for the next several months.
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