According to an article in the Wall Street Journal, “nervous investors have socked $3.4 trillion away in cash.” At the same time, hundreds of billions of dollars have come out of equities in favor of the aforementioned money market funds and bonds. Wow – we haven’t seen this kind of conservatism since the financial crisis.
Some of the fear that is giving rise to this behavior is understandable. After all, the economic expansion has gone on for a long time, and so has the bull market – setting records along the way. It has to end soon, right? And, depending on the data set you favor, it can be argued that valuations are rich, especially the latest mini-run over the last six weeks, which we agree doesn’t seem tethered to fundamentals. For instance, according to Nobel Prize-winning economist Robert Shiller, who pioneered a popular metric, valuations remain near multi-year highs. Finally, money market yields have actually become meaningful over the last few years, rising to an estimated 1.0-1.5% from almost nothing prior to that.
What’s interesting to us, is that most pundits suggest that this is a positive for markets going forward. Some take comfort in these higher cash balances as a sign that markets are not “euphoric”, the last stage of a market cycle that portends a major market correction according to legendary investor Sir John Templeton. Some have jumped on all of this dry powder as a sign that markets could go higher from here as this “nervous” money finds its way back as markets continue to head higher (effectively chasing because of FOMO – fear of missing out).
We believe, even those who hold large cash positions are encouraged, waiting eagerly to dive back into the markets should a pull-back occur and valuations become more reasonable. According to this logic, this kind of thinking could soften the blow of any downturn effectively providing a constructive entry point with low risk of additional downside. This discipline will surely be tested if the markets continue to head higher on the back of sentiment instead of fundamentals.
And that’s really the challenge from our perspective. We believe the recent move higher is largely premised on the belief that slowing global economic growth has bottomed and that trade tensions will be resolved. We have yet to see this optimism showing up in actual corporate results and it appears to us that expectations about 2020 earnings overall still need to come down. Based upon our recent experience scoring potential investment opportunities, we would submit that it is getting harder and harder to find companies that meet or exceed our standards which include having an attractive valuation relative to its growth based upon historical trading ranges.
It seems to us that a little caution in the near term is warranted and prudent. For many reasons described above, we think having a little more cash may not be a bad idea.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of November 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.