Still Plenty of Cash on Sidelines - UBS

by: FP Trading Desk

Now that markets on both sides of the border are bordering on official correction status after a week's worth of selling, investors are getting anxious for the next leg up to begin. With loads of cash still sitting on the sidelines, a little positive economic news could go a long way.

"One reason markets tend to rise sharply off their lows is that there often is plenty of cash on the sidelines waiting for signals of sustained market stability," Joseph-Anthony Sawe, UBS strategist.

Over the past three months, stock funds received positive inflows, coinciding with the March 9th bottom in equities. Despite the strong net inflows, there is still plenty of cash on the sidelines.

Mr. Sawe noted that in 2008, investors withdrew money from equity mutual funds at a record pace, seeking safety in safer near-cash assets.

In March, U.S. money market assets hit a peak of 65% of the S&P 500 market capatilization. Since then, that percentage has dropped to 47%, but that is still well above the 20% average over the last 20 years and the previous peak of 30% in the cycle following the tech wreck earlier this decade.

The strategist said:

Although US household deleveraging may limit the scope of a reallocation back into equities, increasing signs of economic stability could lure investors back into stocks, given the large amount of cash on the sidelines.