Will The "Money On The Sidelines" Ever Return?

Stock market bulls (they are few and far between these days) don't have much in the way of a persuasive argument these days.

For every reason bulls have to get excited about the stock market, bears can come up with 10 solid reasons why a bearish stance is still correct.

One of the most common arguments that I hear bulls make is that the markets are due to roar once all of the "money on the sidelines" returns to the market.

Many investors have been liquidating their positions in the stock market over the past year.

Many small investors are completely exiting the market. Some just prefer the relative "safety" of cash - many need the money in order to pay for expenses and to pay off debt.

Many high net-worth investors also liquidated in 2008. This resulted in a cascade of hedge fund redemption requests, which ended up putting further strain on worldwide stock markets as hedge funds were forced to liquidate positions in order to meet these demands.

The bull argument is quite simple - this money will find its way back into the markets eventually. When it does, the markets will re-ignite and the bull will return.

This line of thinking may be flawed, for the following reasons:

1. Confidence in the markets may take years to return. Is it a given that people are going to pour their money back into the markets in a year? Two years? I'm not so sure. People may be scared to invest in the markets for a long, long time. Does a 55 or 60 year old investor, who is just 5-10 years away from retirement, really want to pile back into the market at this point? Or will they be more worried about capital preservation? I have no doubt that younger investors will return to the market - but how long will that take?

2. The cash may be used for other things. People are struggling right now. Unemployment may rise to 9%. Credit card balances are soaring. Real estate values are plummeting. Many people liquidated their positions in the market because they need this money to survive and/or pay down debt.

3. Other investments may prove to be more attractive. Real estate, investment in privately owned businesses, etc. I'm not sure that people are overly eager to utilize the North American stock markets as an investment vehicle after the events of the past few years.

The mountain of cash on the sidelines may not necessarily find its way back into the market. Those who are waiting for this to happen may be waiting a long time.

Filed under: General Market News