Today, we continue our exploration of why the market’s volume for the year so far had been so light, and more specifically, is there really as much “cash on the sidelines” as the perma-bulls would like to believe? In Part 1, “Are ETFs Behind the Market’s Shrinking Volume,” we concluded that the exchange-traded fund industry is indeed tying up more and more cash that would have otherwise been devoted to individual stock trading (and thus contributing to the volume lull). But the ETF growth craze doesn’t fully explain the removal of all the cash that’s apparently off the grid now.
So, the question remains: Where did all the money go? Is all this cash really waiting in the wings to come swooping in and drive the market/economy higher, or is that just wishful thinking? Here’s the rest of the answer.
Compare it to. . . First, let’s put all the numbers you’re about to read in perspective. The relevant facts are:
- U.S. GDP was $14.7 trillion in 2011.
- The Federal Reserve says the M2 Money Supply (checks, cash, money market, and savings) is currently at $9.7 trillion.
- The total combined market cap for all U.S. stocks is $17.2 trillion.
Mutual funds are getting less and less of it, relatively, though they still manage quite a bit. The verifiable statistics are surprisingly unattainable, and the multitude of unverifiable resources all offer dramatically different pictures. Assuming the truth is somewhere in the middle though (and it generally is), U.S. mutual funds that specifically own U.S.-listed stocks were stagnant in terms of growth last year, with the industry now managing somewhere around $12 trillion in assets. However, no matter which data source offered the numbers, almost all agree that the growth of assets under management is slowing.
Either way, the majority of mutual fund money is presently invested in stocks, and not on the sidelines.
Consumers never really had much to begin with, but they’ve got even less now than they did. It’s a bit of a misnomer to think it’s the collective consumer that can make or break the stock market. Only about one-third of the U.S. stock market’s $17.2 trillion market cap is held directly by individual retail investors. The other two-thirds is still owned by major institutions like mutual funds or pension funds. So, don’t expect consumer attitudes and confidence to make a real dent either way. Sorry — truth hurts. Besides, the country’s noncorporate cash balances are lower than they were a year ago.
So if funds and folks don’t have the money, where is it?
U.S. businesses and venture capital have more of it tied up than you think. All that said, there’s something to the “lots of cash on the sidelines” argument. It’s just not where the average investors (or media pundit for that matter) thinks it is.
As of the end of the third quarter of 2011 — Q4 totals aren’t in yet — U.S. corporations held $2.1 trillion in liquid assets (cash, money market or equivalent) on their balance sheets. Yes, that’s a record in terms of the sum total, and it’s a multi-decade record in terms of percentages. As of the end of September, 14.2% of the dollars “out there” are sitting in companies’ coffers. That’s the highest ratio we’ve seen since the late 70s, but that percentage has been trending higher since 2003 — and it doesn’t appear ready slow down now.
Venture capital firms don’t hog nearly as much cash, but they’ve got more than a little. As of late 2011, VC organizations are sitting on $167 billion in so-called “dry powder” of invested assets. That number has been creeping higher for a couple of years as well.
So to answer the question of where all the money went, blame Corporate America for sitting on it rather than getting it into the system where it can multiply itself. It’s not a mere hope, though. The money really is out there waiting for someone to use it.
But. . . Here’s the thing investors may want to keep in mind about the impact that $2.1 trillion in corporate cash may have if and when these organizations finally start to do something with it: They’re not going to pour it directly into the stock market. So, it’s not going to create a jolt of volume that will reignite the market.
Why? These companies don’t invest by buying or acquiring individual stocks. They invest in their own infrastructure, they invest in their own R&D and they invest in their own growth. (Though to a lesser degree, the same even applies to venture capital funds, which generally don’t buy publicly traded companies.)
Yes, once they start to spend that cash, it will eventually inspire direct investment in the stocks benefiting from that renewed spending. It’s an if-then cycle that could take years to actually get more volume going for the market though, so there’s still no reason to assume all this assumed pent-up demand is going to have a positive impact.
If the market’s volume is going to improve, it’s going to have to improve the hard way — by earning it.