Inertia supports continued climb for stocks

The stock market's wild ride last month undoubtedly gave a lot of investors a healthy wake-up call that left some wondering if now is the time to take some profits and head for the sidelines.

Considering the stellar run of the past five years, with the S&P 500 up nearly 140% from March 2009, it would be easy to make the case for sitting out at least the rest of the summer, just to be safe.

On the other hand, one could buckle up, take a deep breath and move against the grain, which is historically where the advantages are found.

Although that might appear to be a bold contrarian move, some basic logic suggests that inertia is supporting a continued rise for equities. It largely boils down to a lot of cash building on the sidelines, combined with a steady reduction in outstanding stock, as companies continue to repurchase their own shares.

Because there are multiple forces preventing a rush into the markets, such as a weak economic recovery and what looks like new risks around every corner, the equity market supply-and-demand imbalance is less likely to rebound suddenly than it is to provide a kind of floor for the market.

The just-released 2013 U.S. Trust Insights on Wealth and Worth confirms one aspect of the cash-on-the-sidelines argument by pointing out that 56% of investors surveyed admit to having a “substantial amount of funds in cash.”

What this all added up to, according to the Federal Reserve's Flow of Funds Report, was $9.1 trillion in total household balance sheets sitting in cash or cash equivalents at the end of last year.

To some market watchers, this kind of cash on the sidelines looks like potential pent-up demand.

Source:  Jeff Benjamin, Investment News

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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