Cash on the sidelines

A recent Bank of America chart concluded that cash percentages in portfolios are at an average of 15%, which is 7% off the high made in February 2009, when the market bottomed out due to the 2008 financial crisis. While past performance does not indicate future performance, investors can look at this data positively. (I saw the chart while watching a podcast, oxymoron, and have yet to find it online. I recommend The Compound and Friends podcast)

Stocks in 2023 have performed well, but have recently given up some gains in November. Many investors have been defensive and limited market risk by sitting on cash. The Fed’s rate hikes have prompted investors to earn roughly 5% on their cash via money markets. In other words, investors are receiving a 5% return for low risk. In hindsight, these investors have experienced quite the opportunity cost. Assuming investors did not sell into the market rally, year to date the NASDAQ is up 21.72% and the S&P 500 is up 6.34%.

Having cash on the sideline is bullish for the market. As an optimist, I would argue that sidelined cash will be put to work if the Fed leans more dovish and cuts rates. The Fed’s goal was to ease inflation, and year-over-year inflation peaked in 2022. Timing the market is a cardinal sin, but I am not a saint. I do not foresee any more rate hikes which subscribes to a bullish outlook.