Cash (and cash equivalents) on the balance sheets of current S&P 500 members (ex-financials) is at an all time high, which the bulls (which we are one of) argue is a positive element. While we are not usually one to squash fellow bulls this time they perhaps have their thinking incorrect.
The “cash bulls” do have it correct when they say corporations have records levels of cash, but nearly every quarter since 2000 has been a record level of cash. So we wonder why does it matter this time?!
We think a better way to represent cash is as a percentage of market capitalization. By this measure cash has been falling and now stands at 7.4% compared to 9.2% at the start of the bull market in March 2009. The increase in the stock market has been responsible for the decrease in cash as percentage of market value.
We would note that during the five year bull market of 2002 – 2007 cash as a percent of market value averaged 5.0%. In order for cash to return to the 5% level (assuming actual cash remains the same) the S&P 500 would need to rally to 1,961 or 50% from yesterday’s close.