High Cash Stockpile Available for Buying Stocks to Fuel a Rally

Americans have an estimated $8.85 trillion in cash, bank deposits (CDs and savings accounts) and money market funds. [A trillion dollars is one thousand times one billion dollars or one million times a million dollars!] This is roughly equal to 74% of the market cap of the US stock market.

[Chart posted on SiliconInvestor and cites the Federal Reserve Bank of St. Louis and Bloomberg for the statistics.]

Americans have not had so much free cash available as a percentage of stock market value to buy stocks, houses or iPods and big screen TVs since the 1980s, over 20 years ago.


Some think this could signal a rebound for the stock market. The Bloomberg article states:

So-called money of zero maturity, the central bank’s measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, an economist at the Federal Reserve Bank of St. Louis.

‘Dry Powder’

“What the cash pile on the sidelines represents is dry powder,” said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim, which manages about $358 billion. The firm’s $1.17 billion Aim Diversified Dividend Fund beat 96 percent of its competitors this year, and the $3.95 billion Aim Charter Fund topped 93 percent of similar mutual funds.

“Recovery in the second half of the year will probably play out,” Meyer added.

Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

‘Biggest Cannon’

...Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey of economists.

“The fuel supply is there, but people have to have a reason to use it,” said Dickson, who helps oversee about $19 billion. “The Fed fired the shot out of the biggest cannon they know. Now the question is, will it hit the right mark?”

A close look at the chart shows the cash stockpile was even higher when the great bull market began in 1982. The stock market could drop significantly from here to push the line in the second chart to its record level of just over 120% so I am NOT suggesting this is signaling a buy.

What the chart does show is there is a ton of money on the sidelines now compared to January 2000 when the great bull market ended and the secular bear market priced in gold began.

See DJIA Priced in Ounces of GOLD: The Secular Bear Market Continues

Click to enlarge

At the very least, this large amount of highly liquid money is available to fund a significant rally at any time and it may have started already. I added shares to my "newsletter explore portfolio" last year near the lows and will look to take significant profits if this rally comes to be. I will also be watching the chart of the DJIA priced in Gold and many of my other sentiment indicators to get an idea when the rally is long in the tooth so I can sell at the best prices.

Disclosure: None

Comments

[investor88:]

Agree short term bullish.

Jan 06 07:10 AM

[Archman Inv...:]

<<Americans have not had so much free cash available as a percentage of stock market value to buy stocks, houses or iPods and big screen TVs since the 1980s, over 20 years ago.>>

Blah, Blah, Blah. This is another, in a long line of "reasons" as to "why" the markets just "have" to go up.

You forgot to say which Americans are supposedly hoarding all that cash.

It certainly isn't the 90% of Americans who only own 10% of this country's net worth. They are up their eyeballs in debt, have no more than $30K in mutual funds, have less than 30% equity in their homes, etc. Those are real figures from real reports/ surveys done over the past 12 months.

Fact: The top 10% of this country controls 90% of this country's net worth. So if the Fed/ Treasury and their partner trading desks, coupled with short covering, and some of that sidelined money that belongs to the wealthy keeps going into the market, sure, it will go up.

The remaining 90% of mom and pop America will then jump in, and as always, have the rug pulled right out from underneath them.

S & P 500, 25 year continuation trend line is at 750.

From there we can have a real sustainable bull market. If one is a trader, one can buy the S & P 500 at anytime, and trade their way around it. If not, "investors" should only be dipping a toe here and there into the market as the first "real" recession this country faces in the past 2 decades continues to unfold.

The S & P 500 should have been bought when everyone was scared to death in late November. Now everyone and his brother has either found a bottom or listing a 100 other reasons why stocks have to keep going up.

Jan 06 07:39 AM

[ozzy43:]

"...Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg survey of economists."

These are, presumably, the same economists who insisted up until 3 months ago that the US would avoid a recession?

Given how wrong mainstream economists have been about EVERYTHING recently, it makes about as much sense to trust their predictions going forward as it does to listen to the Intel community's prattle about geopolitics. At least the latter don't constrain themselves via wholly artificial and proven-wrong econometric models.

The only economists worth listening to are those who correctly predicted what has happened - that would be one school and one school only: the Austrian economists.

Jan 06 08:43 AM

[t-bird:]

Agree w/Archman...Too many of the baby boomers who have liquid assets are not apt to invest this $ in equities unless they are assured of a sustained rally in the market.

Many of these folks have seen their neighbors wiped out in '08 and are understandably scared right now.

Just remember, there is no guarantee that the Fed will pull this thing off. Accepting 100% assurance in the Fed's ability to contain this crisis is IMO, downright foolish!

Jan 06 08:59 AM

[Roger Knights:]

I agree that reservoirs of cash seeking a home drive markets far more than opinions about whether a market looks cheap or expensive. Looking for such fund-availability is too rarely done by analysts.

(BTW, imagine if 1% of that cash pile went into gold. Investments in gold are becoming semi-respectable and financial advisors are beginning to countenance them.)

Jan 06 09:38 AM

[OldLimey:]

Great comments above.

This market reminds me of a bunch of children egging each other into a cold swimming pool, each unwilling to be the first to take the plunge. Meanwhile, the adults sit back and wait for the sun to emerge from behind the clouds and start heating the water. It still looks cloudy to me and there are some storms roiling about that may or may not hit - so my dry powder is staying under cover.

Jan 06 10:41 AM

[Brad Castro:]

The charts are intriguing and there is a case to be made that there is a plenty of dry powder available. But the question is one of timing. Why would anyone with cash be in a rush to throw it at a volatile market? Maybe the cautious and patient investors still have dry powder for a simple reason - they're cautious and patient.

Jan 06 01:26 PM

[Ebi:]

here we go again

Jan 06 04:22 PM

[secmaven:]

The folks sitting on that huge pile of cash used to enjoy at least 3% interest income per annum. Now that the rate of return is closer to 1% than their historic return, cash holders are certain to be looking to redeploy at least some of their assets. Buying a dividend paying stock with a secure market share like MO would seem to be a no-brainer for some of this cash hoard. Of course a nice bank stock with a good dividend may look attractive too, say BAC, but the likelihood of one's investment in bank equities going to money heaven after what we have seen in 2008 will impede broad scale decisions to move out of cash into this sector.

Jan 06 07:26 PM

[Kunst:]

A lot of money may be out of the markets, but that's because a lot more didn't escape and got destroyed. Not exactly the kind of experience that makes people want to go another round.

Jan 08 03:06 AM