Liquidity fuels market recovery

Cash is king — especially now. Canadian and American investors, it appears, have been salting away billions of dollars of cash during the recent global financial crisis and now are just beginning to slowly and cautiously invest it in the market.

Cash is king — especially now.

Canadian and American investors, it appears, have been salting away billions of dollars of cash during the recent global financial crisis and now are just beginning to slowly and cautiously invest it in the market.

That pile of financial liquidity may just be what is needed to power the market’s next stage of recovery.

“Liquidity is the ingredient that fuels spending and investment,” said Jack Ablin, chief financial officer of Harris Private Bank. “If you don’t have it, you can’t spend it.”

A consumer watch report issued by CIBC World Markets in May found that Canadians have $45 billion in surplus cash that they normally would have invested in the stock market. That represents about 10 per cent of the total personal liquid assets in Canada.

Another report by the Investment Funds Institute of Canada found that Canadians had $73 billion in short-term money market funds in May, an increase of 6.4 per cent over the same month in 2008.

That amount represents about eight per cent of the value of S&P/TSX 60 index.

South of the border, nearly half the value of the U.S. stock market is parked on the sidelines in short-term investments.

“As long as investors haven’t written off equities completely, this enormous stockpile could power the stock market’s next rise,” said Ablin. “History has shown that whenever cash on the sidelines creeps over 25 per cent of the capitalization of the S&P 500, the market tends to rally over 24 months as money filters into the market. Today’s liquidity level is a bullish indicator for stocks for the next two years.”

The decision to “park” cash, however, could end up costing investors billions in lost opportunities.

Despite the recent market recovery, Canadians are still sitting on cash positions that in real terms are 15 per cent higher than in the 2001 downturn, said Benjamin Tal, senior economist at CIBC World Markets.

Canadian investors lost more than $30 billion in investment opportunities by sitting on their cash then, Tal said.

One difference in this downturn is the aversion to risk being demonstrated by younger investors.

“As risk aversion rises with age, it’s hardly a surprise that older Canadians are the first to make a beeline to the safety of cash,” said Tal. “What is surprising is the near 40 per cent contribution Canadians aged 25 to 49 are making to the current liquidity reserve, twice as large as 2001.”

Investors today seem either to be sitting on the sideline waiting to see if the market pulls back from its recent gains or are balancing their portfolios as a hedge against the possibility of inflation in the future.

“The latest U.S. consumer confidence report shows many people feel that inflation is going to be an issue over the next few years,” said Patricia Lovett-Reid, senior vice-president of TD Waterhouse.

“Inflation corrodes buying power, so people are moving to a more balanced portfolio with more fixed income, higher yield bonds and preferred issues.”

Lovett-Reid said investors are moving back into the market slowly and cautiously. Many investors are opting to put money back into the market through systematic savings and investment plans in three-month increments.

“The money is coming back slowly because it is so difficult to time this market (buy at a low and sell at a high),” she said.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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