$7 Trillion Bull Case for Stocks Shows Major Cracks

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  Bullish strategists often cite a record $6.9 trillion in money market funds as potential fuel for stocks.
  

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  But the surge in money market cash might not be because investors are waiting to pile into stock.
  

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  Potential dip buyers don’t see any bargains just yet as the stock market declines on worries of fading economic growth.
  

Wall Street strategists in the last year have pointed to a key reason stocks are likely to keep pushing higher: the mountain of cash on the sidelines.

There’s a record $6.9 trillion in money market funds, according to data from Bank of America. The theory goes that as soon as the stock market sees a compelling dip, investors will rush in, deploying their cash and preventing any downturn from spiraling out of control.

The idea gained steam in September when the Federal Reserve started cutting interest rates, which made holding cash slightly less attractive. The hope was that as yields on safer assets came down, investors would flock back to the stock market and spur a fresh run of gains.

But if the bulls are counting on a “wall of money” to rescue the stock market during its next big sell-off, they might adjust their thinking.

Here’s why.

The problem with this bif the bull thesis is that much of the increase in assets in money market funds is being driven by cash optimization decisions among investors, according to Jay Hatfield, CEO of Infrastructure Capital Advisors.

“During the period of rising money market assets, the level of M1, which included checking accounts but not money market assets, declined by over $2 trillion, indicating that the increase in money market balances was mostly optimization activity and not risk reduction activity,” Hatfield told BI.

In other words, investors took advantage of 5% cash yields by transferring their money out of low-yielding bank checking accounts and transferring it into money market funds.

As long as cash yields don’t crash to zero, it’s unlikely that cash on the sidelines will seek other investment opportunities.

And even if yields did tumble to 0%, that probably means the economy is in trouble, in which case investors will probably not be eager to move their risk-free cash into a more volatile asset like stocks.

According to Larry Tentarelli, chief technical strategist at the Blue Chip Daily Trend Report, the record $7 trillion in cash isn’t all that impressive an amount, at least on a relative basis.

A data analysis by Tentarelli showed that money market cash has been steadily declining as a percentage of the S&P 500’s total market capitalization even as the absolute number has hit records.

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