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Hoarding Cash7/20/09 - After negative returns in 2008 and early 2009, the S&P 500 Index rose 36% from March 9 to June 16, marking one of fastest and most robust starts to a new cyclical bull market ever. Some Investors Arrived Late (Or Not at All) The recent rally mimics historical patterns of investor behavior showing that a large percentage of a new bull market’s total gain typically comes in the early months while the economy remains in recession, and when an above-average number of overly bearish investors are still heavily invested in cash. As the stock market rallied in recent months, there was a very large percentage of assets parked in cash-like, money-market funds relative to the size of the U.S. stock market (see chart at end of article). More specifically, as stocks rallied 32.0%during the three-month period ending in May 2009, assets in money-market funds fell only 2.8%, illustrating that a sizable number of investors either were late to the party or didn’t fully participate in this vibrant rally. High Cash Levels May Provide Price Support Although investor cash levels have fallen from their record high in March, their value is still equivalent to about 40% of the entire U.S. stock market. This level of cash—as a percentage of what it could purchase of the overall stock market—remains much higher than the 27% peak rate seen during the 2000-2002 bear market, and well above the historical average rate of 16%. The high cash levels suggest that many investors remain skeptical about investing in stocks, which is often seen as a positive sentiment indicator for contrarian investors. Investment Implications Given the severity of the ongoing recession and 2008 market decline, it may take longer than in the past for many shellshocked investors to consider reallocating to stocks. Still, the cash stockpile on the sidelines remains so much larger than it historically has been that it would only take a smaller percentage of stock market re-entrants relative to past cycles) to provide a significant boost to stock prices. 
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