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Exploding Cash Pile Will Pump Another Stock Rally, Says JPMorgan

Last Updated September 23, 2020 2:02 PM
Joseph Young
Last Updated September 23, 2020 2:02 PM
  • JPMorgan strategists say that elevated cash holdings can strengthen the foundation for the stock market.
  • Money markets recorded upwards of $5 trillion in cash in late June.
  • Growing cash piles and declining unemployment rates buoy the sentiment around equities.

Strategists at JPMorgan believe global debt to add a staggering $16 trillion this year.  Rising debt, combined with loose financial conditions, might trigger a stock market rally.

As geopolitical risks and adverse effects of the pandemic subside, strategists eventually expect cash to flow back into equities. When that happens, the U.S. stock market could see a new inflow of capital, causing an uptrend.

JPMorgan managing director Nikolaos Panigirtzoglou said:

Elevated cash holdings create a strong background support for non-cash assets such as bonds and equities. Most of this liquidity will eventually be deployed into equities as the need for precautionary savings subsides over time.

stock market
The U.S. stock market treads carefully as new economic data comes out | Source: Yahoo Finance

Cash Hoarding Growing at an Unprecedented Rate is a Positive Factor for Stocks

LPL Financial found that money markets were holding nearly $5 trillion in cash as of June 22.

In recent months, investors rushed into safe-haven assets like cash and bonds to avoid the U.S. stock market.

Strategists generally believe the stock market has been rallying without the involvement of cash on the sidelines.

When investors start to re-enter into equities, a part of the trillions of dollars in cash could flow into stocks.

Ryan Detrick, LPL’s senior market strategist, emphasized that many retail investors remain uninvested in stocks. 

He said:

Even after the 45% bounce, give or take, in the S&P, we haven’t seen really the big part of the retail crowd come back in… It kind of shows again that a lot of people are really still on the sidelines.

Money markets record nearly $5 trillion in cash. Source: LPL, CNBC 

JPMorgan strategists noted that global financial conditions need to remain relaxed to support stock and bond prices. Central banks would have to maintain low-interest rates and high liquidity in the near-term.

Another Variable Can Fuel Stock Market Momentum

One overlooked metric that could buoy the stock market in the upcoming months is the unemployment rate.

Jobless claims, especially in the U.S. and Europe, are high. Cut-offs in international supply chains and the closure of factories led to mass lay-offs.

The Leuthold Group’s chief investment strategist James Paulsen stated the recovery of the job market could cause economic recovery.

The unemployment rate is more likely to rebound than drop  further from the current point. If that happens, Paulsen noted that income and spending levels would increase in tandem.

Paulsen said:

Investors should be appreciating how much room there is for ‘improvement’ in the coming years… and how the stock market, in these conditions, typically does fantastic!

The U.S. Department of Labor’s Bureau of Labor Statistics said the unemployment rate currently stands at 11.1%. 

The Bureau of Labor pinpointed “efforts to contain” the pandemic as the catalyst for the decline in jobless claims.

It declared:

These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it.

An additional drop in the unemployment rate declines might cause the inflow of cash into the stock market to increase in the near-term.