Not dissimilar from a healthy checking account that allows more purchases to be made on a credit card (for those consumers that actually pay off their credit card balances), the current level of money market fund assets remains at a healthy level which bodes well for incremental gains for both equity and fixed income markets in the year ahead. Money market assets are the foundation of markets and the asset management industry as they represent the amount of un-invested cash on the sidelines that can be incrementally invested into stocks and bonds. Historically, when money market assets are severely depleted, markets decline as there is no new money to be put to work to incrementally bid up securities prices. Conversely, the excessive build up of money market assets on the sidelines has marked market bottoms with ample cash available for investors to actually buy stocks and bonds (see money market levels in the chart below in 2002 and 2008 which were major market bottoms). Currently as markets enter 2013, industry money market levels (both institutional and retail money markets) sit at $2.70 trillion, still well above the 20 year average of $1.9 trillion since 1992.
Now the absolute value of money market funds is not as significant as the value of these money funds compared to the value of stocks, to scale exactly how much support indices actually have from un-invested cash. Starting 2013, money markets funds total 21% of the value of the S&P 500 (we simply look at the dollar value of un-invested money funds versus the dollar value of all the stocks in the S&P), still above the 20 year median of 18% and much better than the low of 13% in 1999. This starting level for 2013 could mean continued incremental gains for stocks in the upcoming year. Now while money fund levels continue to move off of record levels since 2008 (where the financial crisis created massive risk aversion and investors selling stocks and bonds and parking funds in money markets) which has fueled the 57% rise in the S&P 500, current levels are still healthy enough to warrant continued gains for stocks in 2013.
To capture potential incremental gains in the upcoming year, investors can purchase StateStreet’s S&P 500 exchange traded fund the SPY, which holds all 500 constituents of the S&P 500 index. The stocks of the asset management industry would also benefit as new funds could come into stock and bond mutual funds. Thus the stocks of Blackrock (BLK), Invesco (IVZ), and T Rowe Price (TROW) would all benefit from money continuing to move off of the sidelines and into securities markets.