On June 23, Beijing time, the stock market quickly rebounded from its March low and willNASDAQThe Nasdaq Composite Index (Nasdaq Composite) pulled back to record highs, and the S&P 500 Index (S&P 500) was close to a positive value during the year, but trillions of dollars in cash are still expected on the market.
According to LPL Financial's research, the coronavirus-induced sell-off has prompted investors to flee to money market funds. The size of money market funds rapidly expanded to over 4 trillion US dollars, surpassing their peak during the financial crisis. According to Refinitiv Lipper (Refinitiv Lipper) data, the influx of capital into the money market pushed the industry's assets to the highest level in history, reaching a peak of 4.672 trillion dollars in the week of May 13. Even with the recent net outflow, more than 90% of the new assets were unaffected.
The money market isn't the only sign that investors aren't holding cash other than stocks and bonds. Federal Reserve Bank of St. Louis (Federal Reserve Bank of St. Louis's data shows that bank deposits have also increased dramatically.
Ryan Detrick (Ryan Detrick), a senior market strategist at LPL Financial, said that high cash levels suggest that many retail investors were scared away by earlier fluctuations and missed the rebound.
Detrick said, “Even after the S&P 500 index rebounded 45%, we haven't seen a large number of retail investors return... This shows once again that many people are still leaving the market and watching.”
As the pandemic spread from China to other countries and hit financial markets, it triggered the fastest 30% correction in the history of the US stock market, while also triggering liquidity problems in the debt market as investors tried to obtain cash.
Edward Jones's investment strategist Nela Richardson (Nela Richardson) said, “Basically, anything that is liquid and can be sold is put up for auction.”
Even though the Federal Reserve (Fed) stepped in to support the credit market and the stock market rebounded sharply, this gap still exists. According toBank of AmericaAccording to (Bank of America) data, as of the beginning of June, the assets managed by money market funds increased by more than 28% compared to the same period last year, while stock funds and ETFs shrank slightly. Despite capital inflows into high-yield bond funds, fixed income funds as a whole also declined slightly.
As the end of the second quarter approaches, fund managers may take action to reinvest this cash into stocks to meet allocation goals. Richardson said she expects a technical rise in the market as investors switch from cash to stocks or high-yield bonds, especially when interest rates are so low.
Richardson said, “Since the actual rate of return is basically zero, and the Federal Reserve says it is expected that the federal funds rate will remain near zero until 2022, this will only increase the impetus to return to the stock market.”
David Waddell (David Waddell), CEO of wealth strategist firm Waddell & Associates, said he believes the impact of this rotation will be minimal, but the additional impact can be seen in “deep bottom-up buying.”
“Those companies that are under-allocated are likely to take advantage of any red tape,” Waddell said.
Detrick said that for retail investors who are cashing out, market fluctuations may have scared them enough to withdraw their funds from the stock market for a long period of time.
“It really takes a while. Detrick said, “If there is a bear market like the one we just experienced, it could impact investors for years.”