Historical Cash Positions & P/E Ratios

The above chart indicates the amount of cash investors have held as a percentage of the Wilshire 5000 at any point dating back to 1974. First, this chart confirms the belief that people invest money when they feel good, and pull money out of the market when they are fearful. Look at the 1990s. The percentage of cash not invested in the market steadily decreased throughout a decade where returns were constantly high. Consequently, in percentage terms, more money was invested in the stock market right before the crash of 2000 than during any other period studied. Additionally, you can see the amount of money pulled out of the market during the last six months or so, even though the majority of damage had already been done. Still, because of fear, people agreed to sell and lock in their losses.

Second, and perhaps more importantly, you can see the large amount of cash that is currently sitting on the sidelines. The first thing I think of after looking at this chart is the large amount of funds that will likely flood the market once investors start feeling better about the state of the economy. Logic would figure that once the market finally develops some momentum, this factor could lead to a healthy, extended rally.

One more chart…

This chart illustrates that historically, the market has performed better when the average price-to-earnings ratio of the S&P 500 was low. As of March 30th, the S&P 500 had a P/E ratio of 13.74. You can see that the ratio is moving further toward the cheap side of the continuum. This could be yet another indicator that the market is getting closer to a bottom.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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