JEREMY SIEGEL, MONEY FUNDS, AND THE STOCK MARKET

1/31/13

Esteemed Professor of Finance at the University of Pennsylvania, and noted permabull, Jeremy Siegel was on CNBC this morning arguing, as he always does, that stocks very cheap and, consequently, the only place to put one’s money is in stocks.  He argued that the much vaunted move of the retail investor into the equity markets has only scratched the surface.  In support of this contention, Professor Siegel argued that there are $3 trillion of assets in money market funds and that much of that money could flow into equities as people tire of earning nothing on their money.  Professor Siegel is far from alone in making this argument; it is a perennial staple of the bulls’ talking points.

As I have stated before, when I was young I knew everything about stocks and the advisability of investing in stocks at any given time.  I knew when the market was cheap and when it was rich, and was ever ready to tell you, or anyone, my opinion on the stock market’s attractiveness or lack thereof.   As I got older, however, I seem to have lost a measure of grey matter because I am largely agnostic on whether stocks are cheap or rich.  The market and what it does seem to get more mysterious by the day.   So I don’t know whether, at this juncture, the market is cheap or rich and, while I have opinions, I am far less confident of those opinions than I was twenty or thirty years ago.

So if one is bullish, as is Jeremy Siegel almost all the time, that is fine; if one is bearish, that is fine as well.   The bulls are about as likely as the bears to be right.  But if one is bullish, the “money market funds have a lot of money to invest” argument is poor reason to be bullish because money market funds always have a lot of assets parked in them; at present, that figure is about $2.7 trillion.   But the vast, overwhelming majority of that money will stay in money market funds; it is not chomping at the bit to dive into the stock market.   The permanent home of most money fund assets is the money market fund.

To cite very recent history, total money fund assets on were about $2.58 trillion on 9/12/12.  They are now, as I said before, about $2.7 trillion.  Thus, money fund assets have increased about $120 billion in the last four and a half months.   $120 billion seems like a large number, but not if you are a Congressperson or are considering the size of the U.S. economy.  To the extent that $120 billion matters, however, if one were to follow Dr. Siegel’s logic, that increase in money fund assets would have a desultory effect on the market as assets grew in money funds rather than flowing out of such funds into stocks.  But the S&P 500 is up just a touch over 3% in the same period.   Admittedly, this is a short time frame, but it is nevertheless illustrative.  And to argue that there were other things at work over the last four and a half months is to argue my point: money fund assets flows have little to do with stock market moves.  Thus, to prognosticate that the stock market is cheap because there is a “lot of money” on the sidelines is to miss the fact that most money fund assets are not on the sidelines; they are on the field on which they choose to play and will stay there.