At the end of November 2008, money market fund assets surpassed stock fund assets for the first time in at least 11 years. This situation came about as a result of equity market declines and high levels of risk aversion. There have been two months of data released since then, with January data (released last Thursday) demonstrating that high money market and cash levels remain. Total stock fund assets are now at their lowest point since September of 2003, as continued declines in equities erode the total value of holdings. Money market fund assets continued to grow, making new highs as investors continue to put money in the safest of assets. This comes as treasury yields hang around historically low levels. Another indicator of continued risk aversion is the portion of stock fund assets that are in liquid assets or cash. Liquid assets in mutual funds as a percentage of total assets jumped to new highs in January to 5.8%, the highest since March 2001, suggesting that money managers are hoarding cash while equity markets trade at the lowest levels seen since the late 90's.
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[I couldn't find a link to the above (it's supposed to have come from briefing.com), but here's some supporting evidence that money fund assets are high]
Many investors are peculiar in the sense that they have most of their money in equities when markets are near tops but have little exposure when markets are at their lows. With the S&P 500 having declined substantially in 2008, there is currently a huge amount of money waiting on the sidelines. US Money Market Funds assets recently increased to US$3.7 trillion (as at 26 November 2008), which is 35% of the total US market capitalisation.
Historically, the US Money Market Assets to US Equity Market Capitalisation proportion has stood at 15%, intuitively increasing when equity markets suffer sharp losses (See Chart 3). This ratio recently reached a new historical high of 39.2% on 19 November 2008, not only due to the decline in the equity market but also due to new inflows of cash into money market instruments. In comparison, the ratio spiked to 26% at the last market bottom in October 2002.
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[but the flow out of stock funds may be starting to reverse???]
Investors in stock mutual funds added modestly to their portfolios in January, reversing seven straight months of net redemptions, according to data released today by Strategic Insight Mutual Fund Research and Consulting LLC of New York.
Despite sharply falling stock prices last month, stock fund positive flows reached $7 billion, according to estimates from Strategic Insight’s Simfund database. Inflows were experienced in U.S. stock funds ($5 billion) and international equity funds ($2 billion).
Also during January, mutual fund investors purchased $21 billion of taxable bond funds, with all key sectors showing gains, and more than $3 billion of tax-free bond funds.
Money market mutual funds benefited from more than $64 billion of net inflows, as money fund assets rose to another record of almost $4 trillion.
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[4/22/09 from E*Trade] Not surprisingly, the long and painful bear market has pushed a lot of money to the sidelines. At the end of 2008, cash in money markets and bank accounts had reached nearly $9 trillion or 74% of the value of all publicly traded stocks in the U.S.!
That was the highest such ratio since 1990 — and it would only take a portion of that money moving back into the market to have a powerful effect on stock prices.