Scared investors haven't hoarded this much cash since 9/11CNN
By Julia Horowitz • Wednesday, May 18 Nervous investors are sitting on huge piles of cash as they try to figure out where the market goes next. The mood hanging over financial markets is anxious and gloomy, whether you're a professional investor or a casual trader.
The CNN Business Fear & Greed Index is in "extreme fear" territory. According to the most recent survey from the American Association of Individual Investors, 49% of members think the stock market will drop in the next six months, versus a historical average of 31%.
And the latest survey of fund managers from Bank of America revealed an "extremely bearish May."
Here's one sign of how deep the dread is running, as inflation soars, the Federal Reserve raises interest rates and the war in Ukraine drags on: Fund managers are holding their highest levels of cash since the aftermath of September 11, 2001.
According to Bank of America, roughly 6.1% of assets under management are being held as cash.
That's compared to 5.9% in the early days of the coronavirus pandemic, and 5.4% in the depths of the 2008 financial crisis, though it's still below the 8% cash level seen in 2001.
"This daily grinding down of prices, it's not surprising you're seeing cash building up," David Coombs, head of multi-asset investments at Rathbones, told me.
Bigger cash piles signal two main assumptions from asset managers, Coombs explained.
First, they think clients could keep heading for the exits, and want to make sure they have enough money on hand to pay out to investors. Second, they think the market still has further to fall, and want to be in a position to buy in when they think it's finally reaching its lows.
Coombs has been drawing down his cash levels to buy select short-dated corporate bonds that he now believes are good value. Unlike many, he sees higher cash levels "as a positive sign."
His logic: It's always darkest before the dawn (though that's my clich, not his).
"Before markets can recover, you have to get expectations really low, because the recovery will come from a positive surprise," Coombs said. "Obviously, you can't have positive surprises unless everyone's really negative."
He's worked in too many bear markets to play the game of trying to call when stocks have bottomed out, he added.
But he thinks the "positive surprise" could ultimately materialize when the Fed backs off interest rate hikes sooner than expected, as price increases do the job of cooling consumer demand and weaker markets raise financing costs for companies.
"I think the Fed is quietly satisfied with what's going on," Coombs said.