Cold Cash Stands Confusedly Beside a Roaring Market
What do you do when you’re sitting on way too much cash while the stock market is hitting new highs?
If you run money for other people--most of whom will judge your performance quarterly--you’re likely to panic and buy stocks like crazy, no matter how you truly feel about the market.
If you run your own money, however, you may stare in disbelief at stocks for a long, long time--because you can’t fathom that other people really are that nuts.
That pretty much sums up the scene today on Wall Street. Institutional investors have led the stampede into stocks since the Persian Gulf War began in mid-January. But their spendable cash reserves now are dwindling. Meanwhile, individual investors have only recently begun to jump into the market with enthusiasm--and many still are hiding behind substantial cash holdings that could be funneled into longer-term investments.
The numbers tell the story:
Indata, a portfolio-monitoring service in Stamford, Conn., that tracks results of 600 money managers nationwide, calculates that managers who run “pure” stock portfolios had 7.7% of their assets in cash (which usually means money-market accounts) in mid-October.
The cash level now is just 6%, says Indata’s Steven Johnson. That is close to the all-time low cash level of 5.7% in May, 1985, he says. When measuring institutional cash, small percentage moves are significant because the total portfolio universe is huge: it’s now $192 billion for such pure stock accounts. Also, the cash percentage never goes to zero, because money managers always keep some liquid assets just to be safe.
* Meanwhile, money-market mutual fund assets have spiraled higher, fed largely by the savings of individual investors. Money fund assets now total $468 billion, up 13% from $415 billion just since the end of December. So even as the stock market has rocketed, many investors have continued to pile cash into traditional short-term parking places such as money funds.
* Another measure of individuals’ caution: At discount broker Charles Schwab & Co., 35% of clients’ assets were in money-market accounts as of Jan. 31, the firm says. That percentage has been rising steadily in recent years, from 28% early in 1987, as investors have increasingly forsaken stocks and other long-term investments for cash.
Now, the stock market is red-hot again, but many individuals still are hanging back. Of course, this isn’t the first time that individuals have trailed institutions’ rush into stocks. The big investors have to act quickly--even recklessly--because they can’t afford for clients to think they’re missing out. “You have to buy--or you lose your job,” shrugs one Los Angeles money manager.
Steven Ledger, who runs a $10-million investment fund for Kayne, Anderson & Co. in L.A., says he talked to the manager of a rival $700-million fund recently who has cut his portfolio cash percentage to 10% from 25% in the last few months. “He said, ‘I know I shouldn’t be buying here, but I have to,’ ” Ledger says. In other words, many stocks appear too pricey to that fund manager--but if his clients see too much cash and too few stocks on the March 31 quarterly statement, they’ll figure he’s been asleep at the wheel during this rally.
That kind of “momentum” bullishness, or bullishness for its own sake, adds a dangerous edge to the market. For individual investors who have yet to commit their dollars to stocks, it becomes even tougher to jump in if you figure the buyer in front of you is playing a momentum game rather than buying stocks because they actually look like good investments.
Still, it’s important to remember that momentum plays a significant role in any bull market move. Momentum often powers stocks much higher than Wall Street initially expects. Even though the Dow Jones average is up 20% from its January low--and nearing the 3,000 mark--we’re early in this market surge, if history is any guide. And given the tremendous sum of money that individuals have built up in cash accounts, the potential is there for a dramatic shift of assets soon into stocks and stock mutual funds.
What’s going to change the cash-hoarders’ minds? Just this: The average yield on money market mutual funds now is 6.2%. A year ago, that yield was 7.8%. The current yield is the lowest since May, 1988. In short, many investors are waking up to the reality that cash no longer pays.
“They can’t justify it anymore,” argues Anthony Chidoni, head of trading at Donaldson, Lufkin & Jenrette Securities in Century City, referring to investors who haven’t budged from their cash mountains. “We have some (clients) who haven’t invested a dime, and they’re nervous and antsy now,” he says.
This certainly isn’t a time to invest all your dimes in stocks. But it’s a very good time to ask how you’ll feel one or two years from now if money fund yields are even lower and the stock market is even higher. In the long run, cash never pays--and in the short run, it doesn’t look so hot either.
