Stock Markets Face Historic Lack of Dry Powder

Investors haven’t had this little to invest in equity markets since 1993, money market funds show — a signal that the bull market may be coming to an end.

Illustration by II

Illustration by II

Investors are running out of dry powder with which to buy when the equity market dips — a concrete indication that the bull market may be running out of steam, according to Milliman Financial Risk Management, which advises on $149 billion in global assets.

As of the end of August, U.S. money market funds held assets of $2.8 trillion. According to Milliman, while that’s a historically high level, it’s a fraction of assets in equity funds. As the stock market has continued to rise, assets in equity mutual funds and ETFs have reached approximately $13 trillion.

“If it’s true that bull markets tend to climb a wall of worry, this metric suggests that it may have run out of ‘worry’ to climb,” said Joe Becker, portfolio strategist at Milliman FRM. “I do think it’s a warning signal,” he said.

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One implication of the low level of money-market fund assets relative to assets in equity funds is that investors today have a relatively small amount of dry powder to buy when equity markets fall, which suggests there may be a lack of technical support that might otherwise be there when investors have relatively more cash.

“The main reason is simply that the more a relationship moves to an extreme end of its range, the more likely it becomes that it will begin to move back toward its longer-term average.”

A historically high level of assets in money market funds, which are a home for risk-averse investors, would generally indicate that investors are feeling cautious. But Becker argued that relative to equity fund assets, money markets are actually low.

Becker said that for asset level data he used the full history offered by Morningstar, which goes back to February 1993, covering 25 years of data. “This suggests that over the last 25 years investors have never felt more confident,” he says.

In this case, such a move could happen quickly or slowly. It could happen more slowly through changes in allocations of new money (e.g. investors decide to stop putting new 401[k] money into equity mutual funds and start putting it into MMFs). Or it could happen quickly through a sharp decline in the stock market, causing equity funds to decline and money-market fund assets to get larger relative to equity fund assets.