‘Really Afraid’
He watched the assets in his own firm’s money-market mutual funds surge by 50% last quarter to $183 billion. The reluctance to spend applies to corporations as well as individuals.

“Companies are really afraid of what this downturn can mean and are drawing down their bank credit lines and trying to strengthen their liquidity profile during this extremely uncertain operating environment,” said Yi. “People overall are still concerned, with some investors simply saying they need to get on the sidelines until the dust settles.”

Risk aversion and economic uncertainty are not the only reason to believe balances in the safe harbors of money-market funds and bank deposit accounts will remain swollen, according to Goldman Sachs. The Treasury yield curve is much flatter than it was in the aftermath of previous recessions, which reduces the opportunity cost of holding short-term bonds compared with long-term securities, Goldman analyst Alessio Rizzi and colleagues wrote in a July 17 note.

While only a handful of the highest-yielding money-market funds and bank savings accounts are paying more than 1%, according to Bankrate.com, Treasuries with a maturity of less than 20 years are yielding below that.

Pricey Stocks
Lofty valuations in equities also raise doubts about the ability of the stock market to lure more cash from the sidelines. The S&P 500 is trading at its highest price-to-earnings valuation in a decade, while the Nasdaq 100 Index hasn’t been this expensive compared with reported profits since January 2005.

And compared with long-term history, the allocation to equities relative to total money supply is elevated and that means the potential for returns remains low, the Goldman analyst wrote.

“There’s a dynamic where, while the stock market may have recovered a great deal of the downward performance from March, there’s still a sense out there that the risks are generally unknown,” said Brett Wander, chief investment officer of fixed income at Charles Schwab Investment Management, which manages $3.85 trillion.

The fiscal piece of the equation is key since many investors assume further stimulus is on its way, but concerns are emerging about a reckoning to come should the financial cushions established in the second quarter disappear or be reduced. And another round of fiscal stimulus may just kick the can down the road if savers are unwilling -- or unable -- to go out and spend.

It all adds up to a “savings shock” that means it won’t just be the Fed’s monetary accommodation that continues to suppress interest rates, said Michael Darda, market strategist at MKM Partners.

This story provided by Bloomberg News.

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