There’s No Cash on the Sidelines
The last number I heard was there is now $6.3T sitting in money markets on the sidelines ready to go. Just waiting for a market correction (that just doesn’t seem to happen). It’s a great headline. It probably helps people sleep at night a little better thinking that there’s this enormous backstop of cash ready to flood in and stop any decline we see in the markets. But, it’s just fake news (timely political reference).
Let’s think about this logically. Then, we’ll look at the data.
Money market investors are inherently cautious. It’s just not very logical to think that people hanging out in money markets are going to take it and shove it into equities (or even long term bonds). That’s like going down the bunny slope for the first time and then deciding you’re ready to take the T-bar up to ski the back bowls. It just doesn’t happen.
Market downturns usually trigger a flight to safety, not a buying spree. When markets go down, money usually flows OUT of stocks and INTO money markets. Sure, eventually a bottom gets found, but the first move is away from risk assets.
The location of the cash has changed. Banks have been slow or outright refused to raise their interest rates on savings and checking accounts. You can call it greedy or whatever you like, but at some point when someone sees they are still making 0.1% on the savings account and can click a button to get 5% in a money market, they are going to do it. But, did that change the purpose of the funds? Did it go from cash in the bank for emergencies, retirement expenses, next year’s vacation, a new deck to cash on the sidelines looking to take risk? Absolutely not.
Alright, now for the data.
Even if I have that behavior entirely wrong, is there actually cash on the sidelines? Over the last 20 years, cash has been about 15% of total financial assets. That’s still the case.
I hate to tell you, but there is no cash on the sidelines.
So, should we be worried?
Not necessarily. The fact that there isn’t a giant pile of cash waiting to rescue the market isn’t a reason to panic. Things have gone just fine and there’s never really been any cash on the sidelines.
