Equity rally runs out of cash

Has the equity rally run out of cash?

Scotia Capital thinks that's a real possibility. Strategist Hugo Ste-Marie is out with a report Monday that shows what's known as the liquid asset ratio at U.S. mutual funds - that's cash holdings in plain English - is at the lowest level seen in decades. Mr. Ste-Marie said that data is "signalling that equity portfolio mangers no longer have cash to redeploy. If new inflows don't kick in soon, the equity rally will sputter."

Scotia Capital also took a look at where American investors are putting their savings. Despite last year's rally, retail investors are steering clear of stocks. Mr. Ste-Marie said: "U.S. equity mutual funds sales declined for a second year in 2009. Money continued to flow out of stock mutual funds last year as withdrawals reached $8.84-billion (U.S.), after the massive $234-billion outflow of 2008."

" Although equities performed well last year, retail investors continued to pour money into bond funds, which attracted almost $375-billion in net new cash flow," said Scotia Capital. "From an asset mix perspective, equity funds account for 47 per cent of total U.S. mutual funds assets compared with 41 per cent in 2008 and a peak of 60 per cent in 2006."