This Week's Message: Realistically Optimistic, For Now...

Your preconceptions, if not your predisposition, could have you judging the graph below in either a positive or a negative light.

Here's our money market fund assets chart since the last recession:
click any chart below to enlarge...


A pessimist would say "that surge higher that began mid-year last year is clearly a negative sign. I mean, folks only pile into money market funds when they're afraid of everything else."

Of course the optimist would say "there's nothing but opportunity there. I mean, there's currently more dry powder ready to push stocks higher than there's been in nearly 9 years."

The realist would say "no, that's negative, folks are selling stocks and going to cash, there's no other viable interpretation."

I take great pains, sometimes painful pains, to overcome my predisposition and to see the world from the viewpoint of the realist. So, absolutely, on its face the surge in money market fund assets is a net real time negative.

Ah, but we're always looking to the future when we look at the markets. We could say, again, that the rise in cash is a direct reflection of a rise in worry; which is in line with the latest readings of the three market sentiment indicators featured in our macro index (although 2 of the 3 have become somewhat more optimistic as the market has rallied this year). And the realist in me has come to realize over the years that, as long as our assessment of conditions still reads expansion, worry (as it breads liquidity [rising cash levels, or, per the optimist, "dry powder"]) can be a good thing. After all, there is that old Wall Street adage:

"Bull markets climb a wall of worry."

Take a look at the bull market of the 90s. I segmented the period where money market assets began to rise, with the stock market (green line [S&P 500]) rising right along with it:



Here's the same phenomenon occurring during the 00s:



The operative words in this entire message are "as long as our assessment of conditions still reads expansion."

Here's that 90s chart with the results of our macro index back tests:



As you can see (negative macro scores as the market began to top out), conditions were deteriorating markedly just before stocks rolled over, abandoning their correlation to rising money market assets.

Same thing for the 00s:



So, for now -- based on the still expansionary conditions reflected in our index (+22) -- I find myself feeling realistically optimistic. Operative words being "for now"...

Have a great weekend!