Cash Crunch: Record-Low Holdings Signal Looming Market Correction, Experts Warn

Investors Slash Cash Holdings, Signaling Potential Market Correction

Investors have significantly reduced their cash holdings as they chase stock market rallies, potentially setting the stage for a market sell-off, according to a recent Bank of America report. The bank’s fund manager survey reveals that cash under management dropped to 3.9% in December, a level historically associated with subsequent market declines.

Bank of America’s analysis indicates that when cash allocations reach such low levels, global stocks typically experience a 2.4% decline in the following month. This “sell signal” has been triggered 12 times since 2011, each time preceding a downturn in the MSCI All-Country World Index.

The December survey showed a record-low cash allocation, with investors heavily shifting into US stocks. This trend is attributed to growing optimism surrounding a potential second term for Donald Trump and anticipated interest rate cuts, which have fueled increased risk-taking behavior among investors.

Michael Hartnett, chief investment strategist at Bank of America, predicts a first-quarter “overshoot” in US stocks due to high exposure to Trump-favored assets. However, he anticipates a significant correction in US equities during the second quarter as market exceptionalism reaches its peak.

The December data revealed a 14% drop in cash allocations, the largest decrease in five years, coinciding with peaks in risk assets. This shift may prompt asset managers to consider reallocating to cheaper international stocks, influenced by financial easing in Europe and Asia.

Despite these bearish indicators, many Wall Street forecasters maintain a positive outlook for the S&P 500 through 2025, albeit with expectations of slower growth. The average forecast suggests an 8% increase in the benchmark index next year.

As investors navigate these market dynamics, uncertainty remains regarding the potential impact of Trump’s protectionist policies on overall market performance. The coming months will be crucial in determining whether the current low cash levels will indeed trigger the anticipated market correction.