The “cash on the sidelines” is a Supply/Demand argument that we’ve struggled with even in the most bullish of times; every purchase of a security is matched with a sale. But even taking the argument at face value, current holdings of retail investors and mutual fund managers suggest that the cash left the sidelines long ago.
Many fund categories are exhibiting similar but muted net cash flow trends to those recorded at this time last year. However, equity ETF net cash flows, both U.S.- and foreign-focused, remain flat in contrast to last year’s strong start. Nonetheless, the definitive shift in trend from bond to equity funds which began midway through 2013 is still intact.
We have maintained that the mere fact that the Financials sector has been successful in raising capital via new equity issuance in the stock market is a good sign that the system is stabilizing. The aftermarket support for these deals indicates a healthy secondary market, and furthermore, points to the presence of ample stock market liquidity.
The YTD $194 billion net inflow through the end of August is now 67% more than 1999’s $116 billion net inflow over the same YTD period, and has already matched the annual record (1997’s $194 billion). Supply/Demand: Offerings volume was very heavy during the first half of August, but began to dry up in the second half of the month.
One thing can be said about the equity fund money flow this year: it just keeps rolling in.
Thanks to the quantitative disciplines (Sector Selection Scores), sector calls and shifts in equity portfolios were mostly on the mark in 1996...except for bad late 1995-1996 Playing The Bounce episode.