By Mike Dolan
LONDON (Reuters) – Stock market peaks typically coincide with troughs in cash holdings – but a regional skew to that picture may be messing with the signal for anyone still wary of U.S. equities.
The overwhelming, almost unnerving, bullishness about Wall Street stocks for 2025 is now pretty clear. Not one of 16 annual outlooks collected by Reuters from top brokers and investors sees the S&P500 lower in 12 months’ time, for example.
And yet the vanishingly small number of “refuseniks” point to one significant reverse indicator to support their case – near historically low global allocations to cash.
Bank of America’s closely-watched survey of asset managers around the world this week spotlighted that average cash levels in portfolios fell below 4% in December for only the second time since June 2021, triggering what it considered another “contrarian” sell signal for equities.
Pointing to 12 such signals since 2011 that resulted in an average global equity loss of more than 2% in the subsequent month, BofA underscored the finding by showing that net cash allocations relative to funds’ benchmarks had plummeted by the most in five years to a record 14% underweight, versus 4% overweight in November.
Underweight cash positions even close to this month’s record were in the past marked by deflating equity markets in early 2002 and 2011.
Tallying with nose-bleed levels of record U.S. equity exposure and economic optimism, where only 6% of funds see a “hard landing” over the next 12 months, the global rotation out of cash and into stocks in the month since the election of Donald Trump has been the biggest in more than 10 years.
Nervous?
Well, that alarming picture masks a number of factors that don’t quite fit the bill.
For a start, it seems to fly in the face of still swelling assets under management at cash-like U.S. money market funds, which at a record $6.77 trillion last week have jumped by a quarter of a trillion dollars since the election and are up a cool trillion over the past 12 months.
While there may be a number of factors driving that persistent rise in money fund AUM – such as reinvested interest earnings or households’ ongoing migration from lower-yielding commercial bank savings accounts – it hardly reflects the sort of drop seen in global funds’ cash levels and allocations.
What’s more, the money fund coffers have continued to expand even since the Federal Reserve began reducing short-term interest rates in September – and amid expectations it will execute its third cut in the cycle on Wednesday.
TRANSATLANTIC FLOW
The clue lies in seemingly unshakeable faith among global investors in the “exceptional” U.S. economic and investment story – also clearly reflected in this month’s BofA survey.
The poll showed funds at their most overweight U.S. equities relative to euro zone stocks in 12 years – the nadir of the euro debt crisis.
What’s more, a subset survey cut of just European asset managers shows where the depth of the cash aversion really lies – with average cash levels among regional funds there almost a full point below global levels and near the lowest in more than a decade.
That figures, given the speed and depth of European Central Bank and Swiss interest rate cuts compared with the relative foot-dragging at the Fed. The ECB and SNB have cut four times each already, with the latter now 160 basis points below the Fed’s policy rate and the Swiss base rate almost back at zero.
With the European economy set to lag the United States significantly again next year, exposed to Trump’s promised trade wars and domestic political upheavals, and rates expected to tumble further as the Fed hesitates, cash appetite is bound to differ.
But judged by the record 36% of European asset managers who report being overweight U.S. equities, and the 30% who expect U.S. stocks to be the best-performing global asset next year, that rundown of cash is heading straight across the Atlantic.
That flow has likely been underway for months and explains much of outsize 6% surge of the dollar against the euro over the past three months, the parallel Wall Street outperformance against euro stocks and the 60-basis-point widening of the transatlantic 10-year debt spread.
And those flows may have further to run.
The key point is the low global cash level reflects the European picture more than the U.S. one.
If the Fed stalls on further rate cuts after this week, then U.S. cash levels could well remain high while they are cut elsewhere in the world – leaving the apparently strange sight of rising U.S. stocks and cash levels intact.
Only some revision to those extreme assumptions of U.S. exceptionalism – possibly involving some radical rethink of the stubborn Fed view – would start to balance that picture.
Neither look likely early next year, but mid-2025 might throw a different light.
The opinions expressed here are those of the author, a columnist for Reuters.
(By Mike Dolan; Editing by Jamie Freed)
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