We last saw this disturbing trend 25 years ago…
Back in 1990, Wall Street firms lost as much as $500 million, stark evidence of the economic disaster that gripped the markets.
A sharp decline in profitability had been widely expected for months.
Tensions in the Middle East slowed trading volume, forcing many investors out of the market.
Businesses collapsed. The junk bond market went up in smoke.
At one point, the Dow plunged 20%. It was on of the worst yearly performances in history.
Investors took a bit of extra caution and loaded up on cash.
Now, as bearishness reaches an extreme not seen since the Internet crash of 2000, we’re seeing much of the same.
Cash is King
In recent weeks, more than $17 billion was pumped into cash funds.
Just over $3.3 billion was pulled from stocks, ETFs and other funds, as investors to protect portfolios from undue risk.
Only $400 million pushed into bonds.
As we mentioned back in 2013:
Sitting around with a large bit of cash and “doing nothing” feels like you’re missing out all of the action. I understand completely. It’s just not an easy thing to do. And it never will be easy to do.
In the current market, however, having cash on hand is not doing anything. It’s more like preparing for future opportunities. Now, I know what you’re thinking. Why am I recommending having a decent amount of cash on hand? It’s a very fair question. And I must explain.
I’m kind of in a tough position at times. As a professional stock researcher, I make my living selling an investment newsletter with new stock recommendations every month. What I focus on is for the equity portion of your portfolio, finding the best stocks to buy.
So yes, recommending investors increase their cash holding a bit may cost a few subscription sales in the short term. But the long-term benefits of guiding you through the risks in one of the riskiest markets I’ve seen in 30 years will pay off for both of us in the long run.
Months after taking that position, some of Wall Street’s biggest names had the same advice.
Mohamed El-Erian would sell out of stocks and move into cash, admitting “[Cash] is not great, given that it gets eaten up by inflation.”
“I think most asset prices have been pushed by central banks to very elevated levels,” he continued. “There is a massive gap right now between asset prices and fundamentals.”
The news sent shockwaves through the investing community.
The press ate it up. And smart money followed.
Now, billionaire Carl Icahn has warned about the unintended consequences of the Federal Reserve.
"It's like a movie theater and somebody yells fire. There is only one little exit door," he said. "The exit door is fine when things are OK but when they yell fire, they can't get through the exit door,” he notes.
The bottom line is, the main reason to have cash in this type of volatile market is that it gives smart investors the opportunity to buy quality small stocks at a good low price. When the market moves back up as it did 25 years ago – those investors will reap the profits.