@buynholdisdead asked for a discussion of how much money is “in and out of the market.”
Buynholdisdead is clearly interested in the stock market. Since I buy a lot of bonds, “the market” includes the bond market also.
The first data point is M1, the level of cash (and cash-like accounts). This is liquid deposits described as cash, checking accounts and other accounts that can be spent immediately. M1 is reported monthly. M1 peaked in May 2022 and has dropped since. The latest data point is January 2023 at $19.6 trillion. M1 is cash spent on everything from kiddie pacifiers to factory payrolls.
Next, let’s look at Retail Money Market Funds (MMFs) which is part of M1. This is probably more relevant to individual investors than M1 since many MMFs are held in brokerages and can immediately be invested in stocks and bonds. Retail Money Market Funds began to spike in June 2022 when the Fed began raising interest rates, closely followed by the yields of MMFs. This is also when the stock and bond markets tanked. The most natural place to put the proceeds from the sale of a stock or bond is a MMF at the same brokerage. The most recent data point is 2023-02-06, before the SVB crisis. The level is at an all-time high of $1.26 trillion.
Stocks are often bought on margin (with borrowed money). The level of stock prices is closely correlated with the level of margin borrowing. Margin borrowing began to fall in October 2021 and bounced back slightly in January 2023 (corresponding to the recovery from the 2022 lows). Since the Fed pushed interest rates higher, margin borrowing is more expensive now than before. Margin borrowing was $641 billion in January 2023, the latest data. Margin Accounts and Transactions at Securities Brokers and Dealers fell sharply in 4Q2022. Hedge funds also showed a sharp drop in Total Secured Borrowing Via Prime Brokerages in 3Q2022 (the latest data = $394 Billion).
I think the data supports the thesis that “there is a lot of money on the sidelines.” Cash in MMFs increased while margin borrowing decreased.
The total market capitalization of the U.S. stock market was $40,511,838.8 million ($40.5 Trillion) as of December 31st, 2022. The market value is the total market cap of all U.S. based public companies listed in the New York Stock Exchange, Nasdaq Stock Market or OTCQX U.S. Market, according to Siblis Research.
As for the bond market, SIFMA Research tracks U.S. fixed income markets, including issuance, trading, and outstanding data breaking out U.S. Treasuries, mortgage-backed securities (MBS), corporate bonds, municipal securities, federal agency securities, asset-backed securities (ABS), and money markets (outstanding data only).
YTD statistics include:
Issuance (as of January 2023) $1,534.8 billion, -16.5% Y/Y Trading (as of January 2023) $972.1 billion, +0.5% Y/Y Outstanding (as of 4Q21) $52.9 trillion, +5.5% Y/Y
The fixed income market is about 20% larger than the stock market. (The bond market data is a year earlier than the stock market data.) The duration of the fixed income market ranges from overnight to 30 years or more.
Rising interest rates hurt bond values directly, since the value of every bond falls when interest rates rise. The longer the duration, the larger the drop.
Rising interest rates hurt stock values in many ways, from the impacts on the underlying companies to the cost of margin borrowing.