Individuals like cash now, but will they in times ahead?

Posted: Friday, March 21, 2003

NEW YORK (AP) Cash may be king to individual investors these days, but whether it stays that way could have a great effect on the stock market's future moves.

Right now, average investors keep steering the bulk of their money into their savings accounts, which they consider a safe haven given all the turbulence in the world, in the economy and on Wall Street.

The key will be what they do in the months ahead. Whether a sustainable rally can happen anytime soon largely depends on their willingness to put their cash back to work in the market.

This is the nature of a bubble when it bursts. At first, people can't get enough. ... Then they say, 'Get me out of here,''' said Edward Yardeni, chief investment officer at Prudential Financial in New York.

Deposits into savings accounts are soaring. There is now about $2.8 trillion tucked away in savings, compared with about $1.8 trillion in the late 1990s, Yardeni said.

The ratio of savings deposits plus retail money market funds to disposable personal income rose to a record 47 percent during January, up from about 35 percent during the stock-market boom, he said.

That's clearly proof of the investing public's risk-averse tendencies right now. They have decided to largely sit out the current volatility on Wall Street, unable to stomach more declines.

It's hard to blame them. The market is suffering through its fourth tough year, and each time things appear to be looking up, selling soon resumes.

So putting money into savings ensures it will be there everything put in when the time comes to retrieve it. That peace of mind, despite the paltry interest rates paid by those accounts, seems more appealing than risking more losses in stocks.

They put their hands in their pockets and are keeping them there,'' said Brian G. Belski, fundamental market strategist at US Bancorp Piper Jaffray. There are too many worries out there. Where is growth? What is going on with interest rates? How about inflation? War? The world economy?''

At least for now, individual investors aren't alone on the sidelines. Many professional money managers are also holding big sums of money in cash because they are worried about investing in a market filled with so much uncertainty.

For the first time since 1993, more mutual fund assets are in cash 40.3 percent than in stocks 39.9 percent, according to a recent report from Merrill Lynch.

By keeping money in cash, they are making an investment decision,'' said Sarah Franks, strategy analyst in the global investing group at Merrill Lynch. It means they prefer cash over equities right now.''

With so much liquidity out there, many investment strategists are saying the market should be poised to rally once some of the uncertainties fade. And they think the surge could happen fast because investors have so much cash on hand, so they don't need to sell anything before they buy.

But getting the professionals to start buying again will likely be easier than persuading individuals to come back.

Baby boomers and retirees continue to feel the sting of the market's free fall, especially with their 401(k) accounts losing much of their value over the last three years. Younger people, who came to investing for the first time during the bull market, watched their portfolios surge to shocking heights and then shrink fast, depleting much of the money they had.

And the fear factor isn't the only barrier. Some fundamentals in the economy, namely the terrible job market, need to improve before average investors are willing to risk venturing into stocks again.

There is a rainy-day motive with all of this buildup in cash,'' said David Resler, chief economist at Nomura Securities. People accumulate cash during times of uncertainty, and these are unique times of uncertainty.''

It's not surprising that individual investors are loading up on cash right now. It's what they decide to do looking ahead that really matters.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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