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Hundreds of billions of dollars in cash have been amassed by big investors in the last few weeks of 2021, setting the stage for a massive risk-on move into equities in the new year.
Investors added more than $43 billion into money market funds last week, bringing the total amount of cash raised in the past seven weeks to a massive $226 billion, according data from Goldman Sachs. The money market stockpile has not declined in 2021 despite the rally in stocks, with assets under management in cash equivalents standing near a record $4.7 trillion, the data showed.
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"My core thesis is that money will come out of negative real yielding cash and out of bonds aggressively and early in 2022 following December board room asset allocation meetings," Scott Rubner, analyst at Goldman Sachs' global markets division, said in a note.
"Every private wealth advisor in the world is conducting 'year-end allocation review' meetings right now. The feedback will be largely that investors hold too much cash with rising inflation," Rubner said.
Investor's cash allocation jumped 14 percentage points this month from November to a net 36% overweight, the highest cash exposure since May 2020, according to Bank of America's monthly fund manager survey.
A lot of the move out of cash could happen in January when money managers make their initial bets of the year. January typically makes up for 134% of the yearly flows, according to Goldman, meaning the month typically sees a big inflow, while the rest of the year has a net outflow.
It also speaks to Wall Street's old theory of "January effect," which believes that there is a seasonal rally in stocks during the first month of the year.
All this cash on the sidelines could be the dry powder that fuels the next leg up in risk assets if investors feel comfortable enough to take on risk. The S&P 500 has rallied over 25% this year as the market climbed a wall of worry from surging inflation to the ongoing pandemic to the rollback of monetary stimulus.
The market seemed to have moved past one of the big uncertainties heading into year-end as stocks jumped in a relief rally after the Federal Reserve signaled a more aggressive unwinding of its monthly bond buying. The central bank also signaled on Wednesday that its members see three hikes in 2022.
"We see another year of positive equity returns coupled with a down year for bonds," BlackRock strategists said in their 2022 market outlook. "Central banks will start to raise rates but remain more tolerant of inflation. The powerful restart of economic activity will be delayed but not derailed due to new virus strains."