Cash!

On one measure, real money investors’ allocation to cash is the highest in more than a decade, and now exceeds the pre-Lehman average.

Some regular readers may be familiar with the methodology. JPMorgan’s Nikolaos Panigirtzoglou frequently cites what he describes as the “most holistic” of the bank’s positioning frameworks for assessing investor allocations across stocks, bonds and cash.

The framework compares global M2 with the AUM of equities and bonds held by non-bank market participants globally, where M2 is the cash balance of investors including households, corporations, pension funds, insurance companies, endowments and SWFs.

As a percentage of total holdings, cash rose dramatically over the past several weeks, eclipsing levels seen in and around the initial COVID panic (figure on the right, below).

“While there has been some downshifting in M2 growth, the stock of M2 to the stock of financial assets stands at its highest level since 2012 given the simultaneous contraction in the value of equities and bonds YTD,” Panigirtzoglou wrote Thursday.

Put differently, the concurrent drawdown in stocks and fixed income left investors with the largest relative cash Overweight in a decade. The implication, Panigirtzoglou suggested, is that equities and bonds could get a bid in the back half of the year.

Of course, that assumes investors are displeased with their suddenly outsized allocation to cash which, I’d note, is no longer totally inert. Apparently, Schwab customers were net buyers of money market funds last month for the first time in years (figure below).

With central banks hiking rates at the most rapid pace in decades, cash is a semi-viable asset class again, with the caveat that when adjusted for inflation, yields on cash-like instruments are hopelessly negative.

Other indicators of investors’ cash allocations are likewise elevated. Anecdotally, for example, cash levels among fund managers are near the highest in decades, according to the June vintage of BofA’s Global Fund Manager (note the high water mark for May circled in the figure, below).

Cash levels likely would’ve exceeded the prior month’s levels in the June BofA poll had the survey not closed before May’s disastrous US CPI report, which tipped the scales in favor of the largest Fed rate hike since 1994.

Meanwhile, JPMorgan’s proxy for S&P futures positioning plunged last week near levels seen in March of 2020, when the global economy was shutting down in the face of the pandemic (figure on the left, above).

Panigirtzoglou pointed to CTAs. “Our position proxy suggests that almost all of the previous post-pandemic position buildup in S&P 500 futures has been unwound this year,” he wrote, adding that CTA signals “saw a steep decline in June, breaching the previous lows seen at the beginning of March.”

But it wasn’t all the momentum crowd. “We suspect that other investors that use equity futures such as Equity L/S hedge funds might have also been behind last week’s big retrenchment,” Panigirtzoglou went on to say, adding that risk parity “appears to have played a role” too, albeit a smaller one.

BofA flagged “broad-based sales of US equities” last week, led by institutional clients and hedge funds, who sold for the fourth and fifth consecutive weeks, according to Jill Carey Hall. Private clients, the biggest buyers of stocks in 2022, were net sellers for the first time in five weeks. “This group has been aggressive buyers of the dip most of this year,” Carey Hall added.

According to Vanda Research, retail traders bought just $509 million in US equities on Tuesday, coming off the holiday weekend. That was the least since March.