The stock market continues to experience remarkable growth, and there is still an opportunity to get in on the action. Despite its impressive performance, investors should take note of the significant amounts of cash waiting on the sidelines.
Chasing a strong market like this one can be difficult. The S&P 500 index has seen an impressive gain of 0.75% this past week, extending its winning streak to eight weeks. Additionally, the Dow Jones Industrial Average rose by 0.2%, while the Nasdaq Composite outpaced them both with a 1.2% increase.
The market’s upward trajectory can be attributed to various factors, and not even a midweek selloff that caused a 1.5% dip in the S&P 500 on Wednesday managed to keep the index down for long. By Friday, investors received the awaited news: the personal-consumption index for November reflected a year-over-year gain of 2.6%, slightly below expectations and lower than the previous reading of 2.9%. These figures reinforce the belief that the Federal Reserve will likely implement interest rate cuts next year.
With an impressive 23% surge in 2023, many investors wonder if they have missed out on the rally. The answer, unfortunately, is yes. Money-market funds currently hold approximately $6.1 trillion in total assets, nearing a record high as reported by the St. Louis Fed. Compared to pre-Covid levels, this represents a remarkable increase of about 29%, as individuals sought the attractive rates provided by cash investments.
Surprisingly, even professional investors are keeping more cash on hand than usual. In a Bank of America survey encompassing trillions of dollars’ worth of assets under management, the average portfolio manager holds around 4.5% in cash. This percentage has decreased from the multidecade peak of just over 6% reached last year, but it still exceeds the lows of slightly over 3%. Clearly, fund managers have a considerable amount of cash available to deploy.
In conclusion, while the stock market continues its impressive run, there is still an opportunity for those who have not yet participated. The substantial cash reserves held by individual investors and professionals alike indicate that there is still room for growth and potential returns in the market.
Equity Exposure: A Promising Market Ahead
The current state of equity exposure is not particularly high. According to Bank of America’s survey, only about 15% of respondents claim to have an overweight position in equities. Although this number has seen some increase in recent months, it remains below the long-term average and significantly lower than historical peaks of over 60%.
However, historical trends indicate that there is still considerable potential for further buying activity, which could provide support to the market in the coming months. Typically, when the Federal Reserve begins to cut interest rates while the economy is still growing, fund managers tend to increase their equity exposure, as was observed in 2003 and 2019. Additionally, as the Fed reduces rates, short-term Treasury yields and cash savings rates are expected to decline, making them less appealing to investors.
Doug Bycoff of the Bycoff Group states, “There’s abundant room for cash to flow into the market.” This suggests that there is ample opportunity for capital to be invested in equities.
Nevertheless, it is important to recognize that simply injecting cash into the market will not automatically lead to higher stock prices. Fortunately, there are several reasons to believe that fundamentals will be supportive. While economic growth is moderating, inflation is slowing down, and interest rates are falling. These factors combined should result in the S&P 500’s aggregate earnings continuing to grow at a robust rate in 2024. Furthermore, sales are expected to experience modest growth, cost inflation is anticipated to subside, profit margins are projected to increase, and companies will likely continue repurchasing stock and paying dividends.
Given these positive indicators, it seems prudent to consider investing in this promising market.