Many bullish pundits argue there is a ton of cash to drive the stock market higher, while bearish pundits claim the U.S. consumer is up to their eyeballs in debt. Each camp has good evidence to back up their claims. The value of money-market funds exceeded stock funds earlier this month for the first time in 16 years. By comparison, the value of stock-fund holdings was more than three times greater than money-market funds in the summer of 2007, just before the market peaked that October. On the other hand total private and public debt in the US rose from about 155% of gross domestic product in the early 1980s to about 340% by the middle of 2008. Average household debt rose from about 75% of annual disposable income in 1990 to very nearly 130% today.
Interestingly, these two concepts are contradictory: in aggregate, either our economy is deleveraging due to excess debt or we are flush with cash. These statistics are a great example why investing can be so difficult. There is a lot of conflicting information in the market place. The best antidote to this problem is for investors to challenge their investment assumptions and be open to information that opposes their viewpoints. This is a critical but difficult task due our behavioral bias.
For what it is worth, our position is that there is a higher chance the cash on the sidelines is not destined to rush back into the stock market but will more likely be used, in aggregate, to pay off debts.