Why Are Investors Holding More Cash?

Bloomberg Retail demand for SpaceX’s IPO is estimated to be around $70 billion.

This amounts to roughly 30% of the $250 billion total; higher than the typical 5-10% rate reserved for retail investors.

Retail investors are no longer the mom-and-pops of the past, openly mocked by professionals.

The growth of retail business in this decade led to a major shift in financial markets. No one could have predicted that a pandemic would trigger the largest retail trade boom in history.

Kale Securities There is some data regarding this trend:

Nine of the ten biggest retail trading days observed on our platform occurred in the last month alone; seven occurred in the first half of June alone. Friday, June 12 was the largest day of retail net purchases in our data set, surpassing the previous record by 50%.

Retail trade is only growing, rather than declining after the pandemic, as many predicted at the time:

The same trend is seen in the options market:

Citadel notes that average daily options volume for retail traders reached record levels in May, up 20% from the previous year. A new volume record was set in the first week of June, followed by another the very next week.

I sense a theme here.

Some of these are, of course, speculative activities. No one trades zero-day options for long-term investment purposes. But retail investors are starting to exhibit institutional-like behavior.

Semiconductor stocks are very popular right now, and for good reason. The returns have been out of this world.

In the last 12 months alone, SanDisk is up more than 4,000%. Western Digital and Micron are up almost 1000%.

Retail investors have noticed this and poured money into the space:

But so do hedge funds (via Michael Harpsichord):

These are now the companies that drive index performance in the S&P 500 and Nasdaq 100. It’s not just meme stocks anymore.

Some experts would like you to believe that markets have devolved into a speculative frenzy of corrupt gamblers. Of course, in boom times like these, some things happen, as one would expect.

However, this is not the case in every corner of the market. In fact, there is data showing that Citadel’s cash holdings as a percentage of financial assets are at their highest level since 1990:

And it’s only growing.

How can cash balances constitute such a large percentage of assets in what many call a speculative frenzy?

First, there are many different types of investors there these days.

There are three more reasons why cash holdings increase rapidly in a bull market:

1. Bond bear market. The 2020s have been (so far) the worst decade ever for bond investors:

Agg suffered its worst decline in history in the bear bond market that started in 2022:

Many investors decided to hold cash instead of bonds for fixed income exposure after the rising interest rate and high inflation environment crushed high-quality bonds.

2. Cash finally has returns. It also helps that cash has much higher rates after more than a decade of market returns:

Earning 3-4% on cash equivalents is not enough to move to the beach and live on interest in a world of 3-4% inflation. But this is much better than the 0% returns that investors were exposed to for much of the post-GFC period.

3. Baby boomers are reducing their risk of retirement. There are currently 45-50 million retired baby boomers. 20-25 million people are approaching retirement.

Many investors are looking for more stability in retirement when it comes to risk assets. Many investors have a cash allocation as a margin of safety in retirement.

That’s how cash allocations could rise amid the AI ​​boom that coincides with the retail trade boom.

There’s something for everyone when it comes to market stories these days.

Michael and I talk about cash allocations, speculation, and much more in this week’s Animal Spirits video:



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Further Reading:
Is This the Worst Decade Ever for Bonds?

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Books:

Risk and Reward podcast tour: