Cash “coursing through the economy” can certainly bolster markets and investment sentiment, says a  recent Bloomberg article by Barry Ritholtz (founder of Ritholtz Wealth Management) that questions some of the popular narratives about how it may or may not affect asset prices.

Ritholtz offers the following insights on specific asset groups:

• Money Supply: The increase in money supply from $4 trillion one year ago to $18 trillion today is “not actual cash in circulation or the result of physical ‘money printing,’ but rather the byproduct of a technical rule change that added savings accounts to M1 money supply.” This calls into question the inflationary impact on financial markets, he argues.
• Cash on the sidelines: The “breathless thesis” by some that “trillions of dollars sitting idly in brokerage accounts is just waiting to be put to work in the market” fails to stand up under scrutiny, says Ritholz. He argues, “there is always cash on the sideline. It is neither a leading nor lagging indicator.” Instead, he says we should focus on the velocity of money (the rate at which money is exchanged). If the velocity starts to accelerate post-pandemic, Ritholz writes, “you may assume it will find its way into stock prices.”
• Cash allocated to individual portfolios: This gauge of sentiment, says Ritholz, is useful “only infrequently and at great extremes.” He cites the following data: In November1987, “right after one of the worst stock market crashes in history, equity was at 45% and cash was 35%.” He notes, “One of the great tells that the pandemic-related crash in early 2020 did not end the bull market was that individual equity allocations never fell below 55.2% and cash never rose above 26.1%.”
• “Successful” Capital: Ritholtz reports that some see the large sums of money put to work in venture capital, private equity, indexing, real estate or cryptocurrencies as “evidence of a bubble,” adding, “This is an overly broad conclusion.”

Ritholz notes: “Bull market misconceptions are a feature of modern markets,” noting that “if everyone agreed on the direction of an asset’s price, it would likely mark the top or bottom of the market. He concludes, “Just don’t expect cash on the sidelines to be the drive of those highs and lows.”