We are living in age of historical lows (and highs). Every day that goes by you hear about some market or indicator carving out a historical record. Sometimes these records are worth noting. On the other hand others are simply misleading. At present one such measure might be the percentage of cash held by equity mutual funds. At the very least we should take a skeptical look at what this indicator is telling us about the market.
Two points. The first is that you cannot look at absolute cash levels without adjusting for the prevailing short-term interest rates (or inflation). Currently short-term interest rates are essentially zero. No wonder no fund manager wants to hold cash. Second there has been a fundamental change in how equity mutual fund managers are measured. In the age of equity style boxes, adherence to a benchmark is highly valued today. One should expect to see lower cash holdings than seen historically. In today’s screencast we discuss how an indicator can lose it value over time.
Posts mentioned in the above screencast:
Mutual funds are “all in.” (Pragmatic Capitalism)
Mutual fund cash as a % of total assets. (SentimenTrader – subs only)
3-Month Treasury bill. (St. Louis Fed)
Mutual fund cash levels adjusted for inflation. (Trader’s Narrative)
Mutual fund cash surplus/deficit. (SentimenTrader – subs only)
An enviable track record. (Marketwatch)
Noise, economic indicators and human action. (Abnormal Returns)