U.S. stocks seem to have hit a ceiling after rallying throughout the month of April. Some investors are worried that the market might tumble again to retest its March low. Cash on the sidelines from the March selloff might help restrain how much stocks could fall.
“Any significant selloff in the bond and stock markets might be limited, as those who had dashed for cash now seek opportunities to rebalance back into bonds and stocks,” Ed Yardeni, Chief Investment Strategist of Yardeni Research, wrote in a Monday note.
There was a mad dash for the haven in March as investors scrambled to sell assets and reduce risk in their portfolios amid the coronavirus fears. At the same time, American households have been cutting back spending relative to their income–either due to worries about an upcoming recession or the shutdown of most non-essential stores, according to Yardeni.
This has resulted in a boosted amount of cash at Americans’ hands, evident in the soaring personal savings–the difference between disposable personal income and personal consumption expenditures– from a seasonally adjusted annual rate of $1.3 trillion in February to $2.2 trillion in March.
As the economy reopens and disposable personal income rebounds, there might be a short-term drop in the saving rate if consumers go on a shopping binge following weeks of lockdown. Still, consumer spending is unlikely to bounce back to the prior-crisis level any time soon, as consumers maintain low confidence in the economic outlook and act more cautiously.
On the business side, fearing for an impending cash crunch, many companies have also drawn down their lines of credit since the beginning of the pandemic. Liquid assets soared $1.7 trillion from the end of February to a record $15.5 trillion in the week of April 20, as companies took large amounts of commercial and industrial loans and parked much of the borrowed cash in the money market funds.
When the Federal Reserve and fiscal stimulus packages poured an unprecedented amount of liquidity into the financial markets, however, stocks snapped back quickly, with the S&P 500 soaring by 31% from March 23 through the end of April and its forward price-to-earnings ratio rocketing from 13 times to 20 times.
A short and sharp relief rally means that many investors–sitting on a mountain of cash–have missed the chance to buy stocks at their bottom, says Yardeni. While the economy’s uncertain outlook and stocks’ expensive valuation might keep them on the sidelines for now, he brings up the usual conundrum following cash-outs–when to return?
Any drop in the market might quickly attract the cashed-out investors, who are waiting for opportunities to get back into risky assets now that liquidity is less of a concern. That should limit how far stocks can fall, says Yardeni.
He expects the S&P 500 to be at 2,900 points by the end of this year, largely flat from the current level. But once the pandemic war is won–whatever the threshold is–the index should be heading higher to reach 3,500 by the year end of 2021.
Write to Evie Liu at evie.liu@barrons.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
