Tuesday, July 21, 2009

cash still king

NEW YORK (AP) — That old saying "cash is king" certainly rings true these days. Investors can't seem to get enough of it, which ultimately could be bad news for the stock market and the economy.

In the past, investors would cling to cash until the market's prospects brightened and then money would pour back into stocks. That's just what the bulls today are hoping will drive a surge on Wall Street in the months ahead.

But the shock of the financial crisis — which have made leverage and risk-taking dirty words — may be changing all that. Even with today's minuscule returns, cash seems to have become a sought-after asset class among investors who intend to keep it as a part of their portfolios for the long term.

Historical data he has crunched shows that whenever assets in money market mutual funds — which are low-risk, highly liquid investments — exceeded 25 percent of the market capitalization of the Standard & Poor's 500 index, stocks have rallied over the following two years.

This ratio jumped to an almost-unheard of level of more than 60 percent on March 9, almost triple the median level in the early years of this decade, for two reasons. Money market fund totals have surged 30 percent since the stock market peaked in October 2007, and by early March the S&P 500's market cap had plunged 57 percent from its high point in 2007.

Today, that ratio has narrowed to about 45 percent, primarily because of a recent rebound in stocks. There is $3.7 trillion sitting in money market mutual funds right now, and the market cap of the S&P 500 is about $8 trillion, up from a March low of $5.9 trillion.

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