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Investor cash levels are near record highs and that could be good news for stocks as a wall of money stands ready to get back into the market immediately.
But the question is: will these investors return anytime soon, especially when sentiment is still so sour and stocks are threatened with a major selloff?
Total net worth in money market funds rose to $4.814 trillion in the week ended January 4, according to the Investment Company Institute. This dwarfs the previous peak of $4.79 trillion in May 2020 in the earlier months of Covid-19.
These amounts include money market fund assets held by retail and institutional investors.
The amount of assets in these money market funds has broken off all-time highs since the beginning of the year, but Wall Street has already taken notice of the cash pile.
“It’s a mountain of money!” wrote Stephen Suttmeier, technical research strategist at Bank of America. “While this seems counterintuitive, higher interest rates have made holding cash more appealing.”
Stay on hold while making money at the same time
Investors concerned about earnings and interest rates may be willing to wait before investing more money in stocks. At the same time, money market funds are actually generating a few percentage points of income for the first time in years.
That means investors may find a safer way to earn a return while waiting for the right moment to invest. Note that Sweep accounts, where investors hold unused cash balances in their brokerage accounts, may park those funds in money market mutual funds or money market deposit accounts.
Cresset Capital’s Jack Ablin said the change in behavior towards money markets reflects a larger change in the investment environment.
“Cash is no longer junk. It pays a reasonable rate of interest, thereby increasing the hurdle that risky assets have to jump over in order to generate additional returns,” Ablin said.
Julian Emanuel, senior managing director at Evercore ISI, said the rise in money markets was a direct result of stocks selling off at year-end.
“If you look at the mid-December flow data, the liquidations were in the March 2020 range,” he said. “In the short term, it was a very contrarian buy signal. For me, at the end of the year, people basically sold the market and just parked it in the money market fund. If the sale continues, they will park more.”
Looking for relatively safe yields
Emanuel anecdotally said he sees signs that investors are moving funds from their lower-paying savings accounts to their brokerage accounts, where returns can be close to 4%.
Note that bank-issued money market accounts are insured by the Federal Deposit Insurance Corporation, but money market funds are not.
However, with inflation rising at an annual rate of 6.5% in December, higher consumer prices are eroding any gains.
Ablin said the change in investor attitudes toward money market funds, and also toward fixed income securities, has coincided with rate hikes by the Federal Reserve. Since last March, the Fed has raised its Fed Funds target range from zero to 0.25% to 4.25% to 4.50%. These money market funds generated little interest prior to these rate hikes.
For example, the Fidelity Government Money Market Fund has a cumulative effective return of 3.99%. The fund returned 1.31% in 2022.
Ablin said bonds have become attractive again for investors looking for yield.
“We like the fact that the bond market is finally starting to support its own weight after many years,” he said. “From this perspective, one would expect a shift away from equities and into bonds. They’ve essentially been fighting stocks with one hand behind their back for 10 years or more.”