While the "cash on the sidelines" myth has infuriated many, it remains a staple excuse for why there's always a buying opportunity in stocks when the market dips. However, as Ned Davis Research warns "we can't find much cash on the sidelines… and when we do it seems mostly offset by debt/liabilities," crushing yet another pillar of strength for stocks.
Ned Davis notes there is a lot of talk about all the cash on the sidelines from pessimistic investors that could power the market higher. There is some public caution and overall savings have risen somewhat, but I am having a hard time finding evidence that cash (potential demand) is anywhere near the market value of stocks (potential supply).
In fact, the only place Davis really finds a lot of cash is from nonfinancial corporations. This cash is being used aggressively to buy back stocks plus mergers and acquisitions. My only problem with corporate cash is that it seems to be financed not out of profit growth, but rather debt offerings. Either way this produces demand, but it can also hurt balance sheet quality (as we have detailed previously)
In conclusion, I can’t find much cash on the sidelines. When I do find it with households or corporations, it seems mostly offset with debt/liabilities.
My view has been that relatively low levels of cash have been a headwind to stocks since the approximately $20 trillion NYSE Composite hit 11105 in the summer of 2014. It closed yesterday at 10548.
Finally, as a reminder, among the most commonly held and oft-repeated beliefs that are wrong or misleading and can potentially hurt investors, asset manager Cliff Asness politely requests people stop saying – "There is a lot of cash on the sidelines." Everyone should pay attention… Via Cliff Asness,
Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.
If you want to save those who say this, I can think of two ways.
First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on.
Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.
But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.
There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.
Add us all up and there are no sidelines.