A Contrarian Perspective on the Trillions of Dollars in Money Market Funds
By Todd Salamone
12/10/2001 1:00 PM ET
schaeffersresearch.com
One thing that I have been noticing, which is getting more and more press from longer-term market bulls, is the "huge" sideline money available that could potentially drive the equity market higher. The bullish case is that money market assets are growing and are at record levels. This cash can potentially drive the market higher. However, their are two sides to every story and I would like to present a side to SchaeffersResearch.com visitors that is somewhat more bleak in its implications, but important, nevertheless.
There is a graph on the front page of today's Wall Street Journal that depicts the growth of money market assets on an absolute basis going back to 1990. My fear is that this graph does not tell the whole story. True, money market assets are growing and are at record levels, but does this sideline money have the same potential impact as it did in late 1994, when stocks began a five-year period of staggering returns?
Currently, there is $4.29 trillion in money market funds. In late 1994, it appears from the graph that there was about $2.5 trillion in money market funds. In the fourth quarter of 1994, the S&P 500 Index (SPX - 1146.62) was trading, on average, around 467.00. Today, it is trading around 1150.00, or 150 percent higher than late 1994. With the market 150 percent higher, money market assets are only 72 percent higher in this time period. This makes it safe to assume that while money market assets are growing and at record levels, the ratio of money market assets to stock market capitalization is no where near record levels.
In essence, for the ratio of money market assets to market capitalization to be the same now as it was in 1994 (a period of pessimism and when Wall Street strategists were significantly more bearish than they are now), money market assets would have to quickly grow to $6.25 trillion. With the market at its current level, this $6.25 trillion figure is 45 percent higher than the current money market figure. Or, the market would have to fall dramatically, or there would have to be a combination of both (falling market, growing money market assets) for what is referred to as "sideline cash" to have the same impact now as it did in late 1994.
The bottom line is that investors who are looking at money market assets in order to assess market sentiment should be more focused on the money market assets as a percentage of market capitalization versus focusing on the absolute dollars only.
- Todd Salamone |
