Several months ago, I posted a blog indicating that equity exposure is at an all-time high in the portfolios of both individual and institutional investors. I suggested two alternative explanations. First, both types of investors may have been historically underweighted in equities, and the current level of exposure is simply a correction of undue conservatism. Second, we are in a mania or equity bubble that could end badly.
Here is another data point to consider. The following graphic depicts the average level of cash in the portfolios of a broad group of institutions surveyed by Bank of America. Note that the most recent reading of 3.2% is a record low. Once again, institutions may have learned that they historically carried excessive cash levels. Alternatively, bullish sentiment abounds.
This kind of data has little or no value in making short-term market forecasts, and the impressive strength in corporate earnings may well justify investors’ bullish posture. However, simply eyeballing the chart leads to the conclusion that institutions typically have low cash exposure at market tops and too much at bottoms.