Equities

Shrinking cash balances provide latest evidence of investor euphoria

Custodians report cash is at record-low levels.

There’s nothing quite like record highs in the stock market combined with historic lows in interest rates to get investors off the sidelines, and that’s exactly what the major custodians are seeing these days.

During Tuesday morning’s earnings call with industry analysts, TD Ameritrade President and CEO Tim Hockey said allocations to cash as a percentage of total client assets are at record-low levels.

While the cash total is up slightly from prior quarters at approximately $150 billion, the 12.7% of total client assets that represents is a new low for TD.

“This low level of client cash we’ve never seen,” Mr. Hockey said.

Asked about the driving forces behind what typically symbolizes investor bullishness, he said, “It certainly feels like this bull market is long in the tooth, but there doesn’t seem to be a catalyst for change.”

TD Ameritrade is not alone in seeing shrinking cash balances as investors continue to pile into a stock market that has gained new momentum since the November 2016 election of Donald J. Trump.

At Fidelity Investments, retail brokerage customers reduced their average cash allocations to 16.07% at the end of 2017, an 18% decrease from 18.89% a year earlier.

The picture is even more stark for 401(k) plan participants using Fidelity, whose cash holdings dropped 35% over the past year to an average of 1.7%, from 2.3% a year ago.

At Charles Schwab & Co., cash as a percentage of client assets is also at a historic low of 10.8%, which compares to 12.5% a year ago.

For perspective, consider that at the March 2009 market bottom in the wake of the 2008 financial crisis, Schwab measured cash as a percentage of total client assets at 23.4%.

Financial professionals view the lighter cash allocations as a typical pattern during extended bull market cycles.

Investor confidence is riding the wave of the Dow Jones Industrial Average’s 31% gain since President Trump’s inauguration last January, marking the best first 12 months for a president since Franklin D. Roosevelt enjoyed a 96.5% first-year run in 1934.

That momentum is being carried forward by the president’s tax-reform package, as well as a strong start to earnings season, which is expected to produce a 14% to 16% year-over-year increase in S&P 500 earnings.

Joshua Pace, president and chief executive of the custodian Trust Company of America, said advisers on his platform tend to be more tactical and typically move in and out of cash throughout market cycles.

However, he said, lower cash levels “makes a ton of sense because this has been such a boring bull market; going up a half a percent every day.”

With that in mind, Mr. Pace added, some financial advisers might feel compelled to jump on the bandwagon of increased market exposure for fear of lagging the market’s returns.

“If you’re an adviser who is leaving too much on the sideline, you’re going to underperform,” he said. “But at the same time, if you think the markets are overheated, you need to keep your finger on the trigger with the 2008 downturn in mind.”

David Demming, president of Demming Financial Services Corp., said his preference has been to become more conservative as the stock market continues pushing to new highs on an almost daily basis.

“Our cash equivalent allocations have been steadily increasing,” he said. “And we’re bringing down some of the portfolio risk by using shorter-duration bonds.”