If you're wondering whether the stock markets are going to run out of gas, you might want to check at the pump.
One persistent feature of the market rally of 2009 was the shift of investor money out of low-yielding but rock-solid cash holdings - where they had parked it in boatloads during the scariest moments of the financial crisis - and back into equities. That return to the market has undoubtedly provided critical fuel to sustain the market rally.
But the latest data in both Canada and the United States suggest that this shift of assets may be near the end of its run.
THE RETURN FROM SAFETY
Capital Economics economist John Higgins noted in a report this week that total assets in U.S. money-market funds (essentially, cash holdings for mutual-fund investors) have fallen to their lowest levels in nearly two years. After peaking last January, shortly before the market bottomed, the decline in money-market holdings has mirrored the rebound in stocks.
Data from the Investment Funds Institute of Canada show a similar trend; as of the end of November (the most recent data available), Canadian money-market assets had fallen to their lowest level since December, 2007, having shed 25 per cent from their peak of last March. That pre-dates the credit-crisis flight to safety.
As the accompanying chart shows, the pace of the shift out of money-market funds has been more or less matched by inflows of money into equity funds - evidence that Canadian investors have spent much of the past year moving their money out of cash and into stocks.
THE SIDELINES ARE BARE
The numbers imply that this re-allocation of parked-for-safety money has largely run its course - meaning a key catalyst for the market rally is pretty much gone.
"Most of the money sitting on the sidelines waiting to be allocated to riskier assets has probably already found a home," Mr. Higgins said. "There is much less cash on the sidelines than before to drive the stock market higher."
For now, there is still a compelling reason to move cash out of money-market funds - interest rates are at historic lows, meaning money markets are providing pathetic returns. (A three-month Canadian T-bill yields 0.2 per cent.)
But with rates expected to climb this year as the economic recovery digs in and central banks move to bring rates back to normal levels, expect what's left of the money-market outflow to dry up.
That's not to say stocks can't still go higher, but they can't count on this return-to-risk play to stoke the flames any longer. The parked money is already back in the market - and the easy gains are over.
David Parkinson