On the Street... Lies, Damn Lies and Statistics
By Matthew Goldstein
November 28, 2001
FACTS ARE GREAT, except when they get in the way of a good story.
Consider the conventional wisdom on Wall Street these days regarding the
record $2.3 trillion that's now sitting in money-market mutual-fund accounts.
For months, Wall Street pompom wavers have been saying that this horde of
cash will eventually flow from the sidelines back into the stock market, a
tsunami of buying pressure that will lift stocks to breathtaking new heights. In
fact, with the stock market's recent gains, some say this redistribution
process is already beginning to take shape, as investors look beyond the
recession and toward an economic recovery.
The trouble is, the story is a myth. Despite the hype, the reality is that much
of the cash that has flowed into money-market funds this year isn't likely to
end up moving into stocks, say several experts who keep tabs on
money-market funds.
For starters, only about half of that $2.3 trillion is money deposited by
individual investors. Corporations, government agencies, financial institutions,
pension funds and nonprofit organizations account for roughly $1.24 trillion of
all the money held in money funds. And for a variety reasons, much of that
money isn't likely to make its way into the stock market — ever.
Experts say that much of the cash in these institutional accounts will either
remain there, be transferred to other interest-bearing financial instruments or
be used to pay bills. That's because businesses, which account for nearly a
third of all institutional deposits, are increasingly using money-market funds
as de facto checking accounts rather than places to park investment dollars
while waiting out a bear market. And the same holds true for many individual
investors, who have come to rely on the cash in money-market funds to pay
for big-ticket items like a child's college-tuition bills or taxes.
"This whole notion of money sitting on the sidelines is kind of silly," says
Brian Reid, a senior economist with the Investment Company Institute, a
mutual-fund industry trade group. For one thing, if individual and institutional
investors were using money funds as a refuge in which to wait out bear
markets, you'd expect to see those funds shrink during bull markets — and
that doesn't happen, Reid says.
In fact, money-market mutual funds had one of their best years ever in 1999,
as total assets rose 19% from the year earlier — and that happened in a year
when the Nasdaq Composite rose 84%. This year, assets are up 25% while
the major stock indexes are in negative territory. Clearly, there's little direct
correlation between stock-market performance and money-market fund flows.
"There's no evidence that when markets are going up, there is a big outflow
from money-market funds," Reid says. "Both households and corporations
always hold liquid assets. During a boom market, it's not like they invest it all
in the stock market."
The main driver behind the rush of cash into money-market funds isn't the
bear market, but Alan Greenspan and his colleagues at the Federal Reserve.
With the Fed cutting interest rates 10 times this year and counting, the
yields on traditional bank savings-deposit accounts and short-term U.S.
Treasury notes have all but evaporated. Yields on money-market funds also
have shriveled, but neither as much nor as quickly. The current yield on a
three-month Treasury bond — a popular short-term investment vehicle — is
1.85%. The typical tax-free money-market mutual-fund yield is 1.91%.
That may not sound like a lot, but the spread — the difference between the
two yields — starts adding up when you've got millions to invest. This hasn't
gone unnoticed at U.S. corporations and other big institutions, which are
responsible for nearly 80% of the growth in money-market-fund assets this
year, according to iMoneyNet, a money-market-fund research firm. Peter
Crane, iMoneyNet vice president and managing editor, says much of the
corporate money flowing into money-market funds is cash that normally
would have been invested in short-term Treasurys or other fixed-income
securities — not stocks. "The big flow from T-bills to money-market funds
started when the Fed started cutting [interest rates] in January," says Crane,
"and it hasn't stopped."
Presumably, this trend might reverse once interest rates start rising again,
but don't look for corporations to put that money into stocks. Kenneth
Froewiss, a finance professor at New York University's Stern School of
Business, says most of the money corporations put in money-market funds
and other short-term liquid assets is designated as "working capital" that
must be easily accessible. "It's not money that would normally be invested in
equities or as seed money" in another business or venture, he says.
None of this is to say that some of the cash sitting in money-market funds — in particular, accounts held by individual
investors — won't eventually be reinvested in the stock market. Indeed, we're already starting to see some of that
happening. Over the past month, iMoneyNet says $7 billion was withdrawn from retail money-market-fund accounts. In
October, AMG Data, a mutual-fund research firm, reported that stock funds took in $1.6 billion in new money.
But Crane isn't bracing for a flood of individual withdrawals. He notes that more and more individuals are using
"money-market funds as a checking account rather than a savings account."
Actually, the one place where some real money may be sitting is in bank certificates of deposit. Right now, the market
for CDs is ice cold, since the average annual yield on a one-year CD is a meager 2.81%, according to Bankrate.com, an
online-bank research firm. But last year at this time, just before the Fed started slashing interest rates, many banks
were offering CDs with annual yields of more than 7%. Investors gobbled them up, pouring approximately $23 billion into
CDs of $100,000 or less. Presumably, many of those instruments are now maturing. Since current rates are so low, it
doesn't make much sense for investors to roll their money over to new CDs. Experts predict that some of that money will
wind up in the stock market.
But even if all $23 billion were plowed into stocks, that would be small potatoes compared with the $2.3 trillion in
money-market funds that Wall Street so eagerly points to. If you're considering putting some money into the market
because you think stock prices have just about bottomed out, by all means do so. But don't make an investment
decision because someone says you should get back into stocks ahead of all the cash sitting on the sidelines. Most of
that money is probably parked there for good.
smartmoney.com |
