Big Move to Cash Can Be Sign of Worrisome Trend

Stock mutual funds have plenty of cash with which to fuel another bull market surge.

But what if the money stops flowing in from individual investors? Or worse, what if investors start pulling money out of stocks?

So far in May, many fund companies say their stock-fund inflows are strong, but well below the near-record levels of April.

At the same time, there has been a marked jump in cash in checking, savings and money market accounts nationwide--suggesting that many people are growing cautious about investing new money.

Valley Forge, Pa.-based Vanguard Group, one of the largest mutual fund firms, says net purchases of its stock funds total $470 million so far this month. With three-quarters of May over, the full-month inflow will clearly lag the $1.1 billion that Vanguard stock funds received in April.

Meanwhile, investors suddenly are squirreling huge sums into short-term cash accounts.

So-called M2, a measure of the nation’s money supply that includes cash in checking accounts, savings accounts and money market funds, soared $20.1 billion to a seasonally adjusted $3,502 billion in the week ended May 10. That followed a rise of $13.6 billion the prior week.

Why the big move to cash? Economists aren’t sure. Some people could be depositing tax refunds in short-term accounts. Others could be cashing in bank CDs and storing the money temporarily in savings accounts or money market funds.

For the stock market, this trend could be good or bad. If stock prices keep surging, many investors may be compelled to hurriedly shift cash into stocks.

But if worried investors are moving into short-term accounts because they anticipate rising interest rates--and if rates do indeed rise--stock fund managers could face their greatest fear: Instead of taking money in, the funds could begin to see investors bail out of stocks for the first time in years.