Something unusual has been happening the last two years. There has been a 70.8% rise in money market holdings since 2018 to April of this year. As of April of 2020, $5.2 trillion dollars has been sitting around in money market instruments all while interest rates are at record lows.

In just 4 months of this year alone, there was a 31.8% spike into MM. Massive amounts of people sought safety and hundreds of billions of dollars worldwide missed the recovery.

 

Bubbles form and pop when markets least expect it but with so much cash sidelined could we really face another significant correction?

The recovery was led by information tech and consumer discretionary. Many other parts of the economy are still in the red.

Energy got hit the hardest but looks like things are about to turn around with M&A activity on the rise. It’s usually a sign that companies are more optimistic about their outlooks.

So many are sitting in cash one has to wonder why. Fear of COVID-19? Elevated valuations? Trade spat with China? In this near zero interest rate environment?! Globally?!

If there is any bubble forming in the markets, you would have to assume it’s likely in tech.

It seems more people believe tech companies like the FANG stocks deserve higher multiples due to the fact that they are now realized as pandemic proof and recession proof companies. I’m not sure if I can agree with that 100% but I do believe stocks warrant higher valuations in this interest rate environment in a broader sense. The more important question is will the FED’s steer inflation and adjust rates appropriately while not damaging the economy when the time comes!

Here are some fun set of questions to ponder.

1. What is causing this flight to safety?
2. How long would people be comfortable with sitting on low returns?
3. What catalysts would cause people to re-deploy some of that cash back into risk assets?
4. Could lack of job security and the need for liquidity be one of the primary factors exacerbating the flight to safety in 2020?
5. Could progress in vaccine research alone start the reversal towards risk assets?
6. Could the sidelined cash result to stemming of any significant downside due to FOMO? 🙄
7. Will the stance on monetary policy by the FED’s for the next 2 years force investors towards risk assets particular stocks?
8. Will investors accept elevated valuations assuming a prolonged period of low global interest rate environment?
9. If so, could elevated valuations continue on for years buoyed by massive amounts of sidelined cash?
10. What would happen if a spike in inflation resulted from all the stimulus spending forcing the FED’s to reverse their policy much sooner than expected?

 

Final Thoughts

It’s hard not to see a lost decade of some sort coming our way especially with all this new debt on companies balance sheets. Unless there is another massive economic expansion sparked by technologies such as 5G, AI, and robotic advancements at a scale large enough to do the heavy lifting for the stagnant parts of the economy.

We seem to be setting ourselves up for a 5-10 year period of catching up and consolidation where markets as a whole will likely tread sideways with minimal to lower than historic average gains in the S&P.

Maybe the FED’s have it figured out and can engineer, manipulate and encourage the right environment for the country with all that they have learned for decades to come. Kicking the debt ball down to the next generation to work off somehow. 🤦‍♂️

The traditionalists view current valuations at the current economic back drop too frothy to justify regardless of where interest rates currently sits. They believe the interest rate environment is temporary and short term in nature. The first signs of a reversal in policy risks correction.

Some argue that this new era of information and data will bring higher valuations to stocks in part due to the fact that more people have access to the markets and the abundance of information on the internet makes investing more accessible to a wider audience. The increase in demand and liquidity is contributing to the rising valuations for stocks and will continue forward.

Regardless of all the many opinions out there, the trends show an upward and rising valuation for stocks over a century. Putting everything into consideration what do you think? Are you one of those who are mostly in cash right now? Or perhaps you’re fully invested? What is your thesis on why you are sitting out or fully invested? Love to hear your thoughts! 🙂