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Are Investors Under-Invested?


Not under-invested...maybe just "invested"?


A good way to tell if investors are scared is to watch where they put their money. When they flee en masse to the safest investments, then it's a pretty good sign that we're seeing excessive uncertainty, and stocks are about to rally.

The latest release from AMG Data showed that assets sitting in money market accounts recently hit $3.2 trln, a new record after a weekly inflow of $48 bln. While money markets may not be as safe as everyone thought after recent subprime-related fiascos, they're still where people put their money in times of uncertainty to earn a good yield in a highly liquid instrument.

So is the recent money market record a sign that investors have become too pessimistic about the potential for stocks? Not quite.

The chart below shows the raw dollar amount invested in money market funds. This data comes from the Investment Company Institute, which gets a different total than AMG Data. Still, their current figure of $2.6 trln is 30% above the previous peak set in 2002 and 2003.

Click here to enlarge.

However, looking at money market funds in isolation as a sign of investor sentiment is misleading. We should also take a look at the amount invested in equity mutual funds to get a sense of overall asset allocation.

The chart below does just that, and we can see that those assets are not only near a record, they are 43% above the previous peak set in the fall of 2000.

Click here to enlarge.

If we combine the two charts and come up with a ratio of total money market assets to total stock fund assets, then we can get a better picture of where sentiment lies.

As the chart below shows, money market assets are currently 40% of equity fund assets, well below the bear-market peak of nearly 80%. So while it may seem impressive that there's enough cash sitting on the sidelines to buy 18% of the S&P 500, it's not necessarily a sign that investors are currently under-invested.

Click here to enlarge.


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No positions in stocks mentioned.

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