Cash Glut Could Take Markets on a Ride

There's more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.

The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg News.

Leuthold, Invesco Aim Advisors, Hennessy Advisors and BlackRock, which together oversee almost $1.7 trillion, say that's a sign the Standard & Poor's 500-stock index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the largest annual drop since 1931. The eight previous times that cash peaked compared with the market's capitalization the S&P 500 rose an average 24 percent in six months, according to data compiled by Bloomberg News.

"There is a store of cash out there that is able to take the market higher," said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. "The same dollar you had last year buys you twice as much S&P 500 as it did a year ago."

Leuthold Group, whose Grizzly Short Fund returned 83 percent in 2008 thanks to bets against equities, said in its December bulletin to investors that stocks offer "one of the great buying opportunities of your lifetime."

The ratio of cash on hand to U.S. market capitalization jumped 86 percent in the first 11 months of the year, the biggest increase since the Fed began keeping records in 1959, as the United States, Europe and Japan fell into the first simultaneous recessions since World War II.

So-called money of zero maturity, the central bank's measure of U.S. assets available for immediate spending, is mostly held by households, according to Richard G. Anderson, an economist at the Federal Reserve Bank of St. Louis.

"What the cash pile on the sidelines represents is dry powder," said Fritz Meyer, senior market strategist at Invesco Aim, which manages about $358 billion. The firm's $1.17 billion Aim Diversified Dividend Fund beat 96 percent of its competitors this year, and the $3.95 billion Aim Charter Fund topped 93 percent of similar mutual funds.

"Recovery in the second half of the year will probably play out," Meyer added.

Any recovery will depend on a rebound in corporate profits and the economy after $30 trillion was wiped out from world equities this year, according to Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Ore.

Jobless claims reached a 26-year high last week. A 13 percent slump in the median home resale price in November from a year earlier was likely the largest since the 1930s, the National Association of Realtors said last week, damping speculation that the housing market is close to a bottom.

Analysts estimate profits at S&P 500 companies will shrink 10.3 percent in the first three months of 2009 and 5.8 percent in the second quarter, bringing the stretch of earnings declines to a record eight quarters, Bloomberg News data show. Gross domestic product will contract in the first half of the year before growth resumes in the third quarter, according to a Bloomberg News survey of economists.