According to a Bank of America Merrill Lynch survey just released, professional investors have a greater share of their portfolios in cash this month than they've had in a decade. In other words, the overall sentiment is that stock prices are going to head lower. Money on the sidelines is safe from a correction, and stands ready to be deployed when bargains appear. So, do the pros know something we don't, or is this a good time to be buying while market euphoria is tempered?
In this Market Foolery podcast, host Mac Greer and senior analysts Andy Cross and Jason Moser parse those questions, and consider what you might want to do with your portfolio.
A full transcript follows the video.
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This video was recorded on Feb. 12, 2019.
Mac Greer: Let's begin with the subject of cold, hard cash. A Bank of America Merrill Lynch survey found that professional investors took their highest cash positions in 10 years during the month of January. Andy, a lot of cash on the sidelines. What does it mean for investors?
Andy Cross: Well, they don't know anything more than you know, Mac.
Jason Moser: Now, wait a minute, let's not get ahead of ourselves ...
Cross: Here's the deal. We came off the worst Q4 in December that we've seen in a long time, so they're nervous Nellies. They're just thinking all negative. They moved to cash, looking for better prices. They got it in January. Maybe they deployed some of that. I'm not surprised by that. Tom Gardner and I have been tracking a metric that compares cash in money market funds to overall stock capitalization, and looking at that ratio as well, too. When that ratio gets somewhere into a level of above 10%, 11%, 12%, I start to get really interested in putting some equity to work. Historically, it's been somewhere around 10% or 11%. The lower it gets, it says that more people are interested in investing, so there's a little bit more euphoria in the markets. The higher that metric goes -- like we're seeing with these professional money managers hoarding some cash -- people are waiting for some better prices. That's a lot of capital that could come into the markets.
Greer: Jason, along those lines, there are two ways to look at this story. One way is, "Wow, what do the pros know that I don't that they're all in cash?" But the other way is, "Hey, what a great time to be in stocks if there's all this cash on the sidelines waiting to come into the market."
Moser: Yeah. If you look at the way 2018 closed out, it does make sense. There was a lot of selling. The market finished up on the downside. That money goes somewhere. It's not like it was rotating from sector to sector. The S&P in general had a bad year last year, and the last two months of the year were really bad.
Cross: All asset classes went down.
Moser: Yeah. That money goes somewhere. So, it makes sense the cash balances right now -- I like the way you're thinking about it. To me, it does sound like there's a lot of cash on the sidelines, people waiting for some bargains to come around. It seems like we're obviously in a very volatile time politically speaking, and headlines drive a lot of what the markets are doing day to day. Fundamentally still a lot of great businesses out there doing a lot of great things. Valuations really aren't all that out of hand when you look at it from that perspective. I mean, I have a pretty good chunk of cash myself. I'm ready to put that to work as well. I think it's a great time to be an investor to have your watchlist in order, because when those opportunities come, you want to be able to pull the trigger.