Where's the Cash Headed?

05/21/2014 12:01 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Cash is flowing out of US equities at the moment, leaving MoneyShow's Jim Jubak with lots of questions, but also, some possible answers.

So, where is the cash headed?

It’s coming out of US equities right now and moving to the sidelines. That’s only a temporary destination, however. Will cash flow back into US stocks with a strengthening US economy, as managers of US investment vehicles believe? Is it headed for Europe on a bet that the European Central Bank is about to stimulate the EuroZone economy? Might it begin looking to emerging markets on a wave of political enthusiasm following the Indian election?

Investors have pulled $10 billion from mutual funds that invest in US equities in May, according to the Investment Company Institute. Another $7.7 billion has come out of ETFs (exchange traded funds) that invest in US stocks, according to Bloomberg. Cash positions have hit a two-year high.

That’s a big reversal: In the last three months, investors put $35 billion into mutual funds that invest in US equities, according to the Investment Company Institute.

US seems to be particularly out of favor. A Bank of America survey published last week had investment managers naming the United States as the worst place to invest. I think that opinion is a result of major US indexes trading near all-time highs and a sell off in small-cap and momentum shares. The small-cap Russell 2000 index is down 8.8% from its March 4 high through last Friday’s close. The NASDAQ Internet Index is down 18% from its March 6 high. That has left individual investors fearing a replay of the dot.com bust for 2000 or the post-Lehman bankruptcy global financial crisis bear market. Withdrawals by individuals from mutual funds are, however, an unreliable indicator for market timing. From 2009 through 2012, individuals pulled $400 billion out of US equity funds.

If the US is out of favor, Europe is in favor, with investors in the Bank of America survey calling European stocks undervalued. That seems questionable—the US Standard & Poor’s 500 currently trades at 16 times projected earnings versus 15 times projected earnings for the Stoxx Europe 600 Index—unless you assume that the European Central Bank will strongly stimulate the EuroZone economy at its June meeting. (My take is stimulus, yes, but strong stimulus, no, in June.)

Another possible destination is emerging markets on enthusiasm from events in India.

Anticipation of a Modi victory/Congress Party defeat drove the Mumbai market indexes to record highs in the weeks before the results were official. That enthusiasm is likely to continue for a while—analysts are calling for another 10% gain in Indian stocks—but more important to me is the possibility that the “Indian lesson” will drive up stock prices in Indonesia and Brazil ahead of elections in those two countries.

If the People’s Bank of China started to loosen money supply in June or July, we could see enough of the money on the sidelines head to emerging markets to set off a rally in that sector.

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