Since the darkest days of recent market pain in late 2008 and early 2009, stocks have rallied significantly. In spite of this market correction, though, most investors still have a long way to go to get back to where they were.

Our current economic crisis has been compared to the Great Depression of the 1930s so many times that it’s tempting to believe this might actually be true. Don’t be fooled; it’s not. The way economists measure recessions and depressions is by the decline in gross domestic product (GDP). The Dirty Thirties saw the U.S. GDP decline by almost a third, some 30%.

Let’s put that into context. Since World War II, there have been about ten recessions. The average decline in GDP, from peak to trough, was 1.7%. This current recession is perhaps a little worse than the average, and will likely see a decline of about 2%. This tells you that any comparison to the Great Depression is unfounded: there’s a vast gulf between a 2% and a 30% decline. Granted, we’re in the worst recession since 1982 – but that’s it.

One thing the media have got right, though, is our reaction to market declines. When markets begin to drop, investors pull out their money to avoid further losses; and then each wave of selling sparks further selling. Declines tend to feed on themselves, in a descending spiral of pessimism.

And what do investors usually do with all that cash they pull out of the market? They generally move it to a safe vehicle, such as a money-market fund. Money market balances commonly peak at market troughs, and are lowest when markets are strong.

A good example from the records is 1982. On September 19, 1982, just before that bear market ended, money-market funds represented a value of 19% of the total value of the stock market in the U.S. And look at October 2002, in the dying days of the last major bear market. Then, money-market funds stood at 30% of total market capitalization.

And at the end of 2008, when fears of economic disaster reached their zenith, that figure went up to a remarkable 45%. Granted, since then some of this cash hoard has worked its way back into the capital markets. Today, money market funds equal 34% of market cap. Overall, investors remain cautious, largely content to wait on the sidelines and watch for evidence of a serious turnaround. That kind of wait-and-see liquidity is certainly consistent with the historical symptoms of the end of a bear market.

This river of money market liquidity is blocked by a dam of investor fear. Although the fear is real and well-founded, eventually the dam will give way – as it has in all previous bear markets. And when those huge amounts of cash are released, the markets soar.

There has rarely been more cash behind the dam than there is today. Most of it is looking for a way out. For investors in cash waiting for the “right” time – that right time is before the dam gives way.

Alan MacDonald is an investment advisor with Richardson Partners Financial Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson Partners Financial Limited is a member of CIPF.

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