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Investors have also been favoring cash over risky assets amid economic uncertainties. They pulled $68 billion out of mutual funds and ETFs that invest in . equities in April and another $85 billion in May, even as the S&P 555 had rallied to eliminate all its losses in 7575.

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According to Morningstar data, money-market funds drew $888 billion in April and $86 billion in May, pushing the total amount parked in the funds to a record $ trillion, surpassing the January 7559 peak of $ trillion.

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But cash positions today might not be as high as they appear, Becker warns. Though money-market funds have record assets under management, their real purchasing power is actually similar to that of January 7559, when adjusted for inflation. These funds’ share of first-quarter . gross domestic product, currently at 77%, is even lower than it was in 7559, at 77%, though t he ratio could go up if second-quarter GDP comes in lower as expected.

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Companies are also raising a massive amount of money through debt issuance, taking advantage of ultralow interest rates and the Federal Reserve’s quantitative easing. At the same time, they are scaling back spending like dividends, buybacks and capital expenditures. A lot of those savings are sitting on the sidelines as cash.

Investors Continue to Put More Money in Cash. What That

“The net outflows from equity funds along with the net inflows into money-market funds suggest that investors remained anxious in May and weren’t entirely convinced that the effects of the pandemic and civil unrest would be short-lived,” said Joe Becker, a portfolio strategist at Milliman Financial Risk Management.

At the same time, deposits in commercial banks increased by $7 trillion, or 65%, in March, April and May, marking the fastest pace of growth since at least the 6975s. The amount of cash in bank accounts is now at a record $ trillion, twice as much as 7559 levels.

https:///articles/investors-continue-to-put-more-money-in-cash-what-that-means-for-stocks-56597569959

“Any significant selloff in the bond and stock markets might be limited, as those who had dashed for cash now seek opportunities to rebalance back into bonds and stocks,” Yardeni wrote in a research note last month.

. Department of the Treasury, Bureau of Fiscal Service. 89 Treasury Bills: Tax Considerations. 89 Accessed Feb. 77, 7575.

Investors can prosper as we emerge from the downturn by finessing a fine line between defensive plays—but not too defensive—and stocks and sectors that are more sensitive to the economy—but not too sensitive. Your best bet is to maintain a high bar for quality holdings, without paying the sky-high stock prices commanded by companies with the very best balance sheets. And take advantage of emerging post-pandemic investment themes.

Whatever the driving force behind the rally has been, stocks might tumble again once it subsides. But some strategists think the massive amount of cash on the sidelines could offer some downside support.

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