Despite the continued negative news flows and slacker summer attitudes on trading desks, the markets have been holding up fairly well. The continued suicide bombings in Iraq, the execution of hostages, combining with the inevitably higher interest rates could easily have taken a nasty toll on equities.
Since rallying off of their May 17th lows, the markets have been biding time. They seem almost to be giving their 50-day moving averages a chance to catch up with the indices recent gains. While the digestion of the last rally is ongoing – and a generally healthy process – we wish to note the general attitude amongst both institutions and individual investors has veered towards a previous, less healthy perspective: once again, cash ain’t trash.
We see the manifestations of this sentiment shift in several guises. Trading volume has dropped precipitously at all of the discount shops (Schwab, Ameritrade, E*trade). Although some of that lack of activity may merely be reflecting day trader’s vacations, there must be recognition that buyers’ appetites have become somewhat sated.
Further, some investors are (appropriately, in our opinion) anticipating potential volatility, possibly due to external events. Whether its domestic terror or interruptions in oil supply, some stock buyers have amassed some cash in anticipation of a possible buying opportunity later this summer. This is clearly reflected in the mutual fund flow data. AMG Data reports that equity fund inflows plummeted in May to a mere $334 million, from fund Inflows of $24.5 billion in April and $21.4 billion in March.
The raising of cash is not limited to individuals; The WSJ reported that many fund managers have also raised cash. According to a Merrill Lynch’s monthly fund-manager survey, 31% of global asset allocators described themselves as holding more cash than usual. The good news is, we suspect this trend is tailing off. So far, each of the first two weeks of June has seen inflows of about $1.4 billion – far greater than the entire month of equity inflows March.
As fund managers find themselves awash in more and more cash, they must find some place to put it to work. Bond funds have seen substantial outflows, and fixed income is unlikely to be the where performance driven managers – not at least until interest rates are much higher – will go. The Fed has, once again, succeeded in making cash trash. That should be a net positive for stocks over the next few quarters.