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With investor cash holdings approaching record highs and a wall of money poised to return to the market soon, this could be good news for stocks.
But the problem is: Will these investors bounce back anytime soon, especially as sentiment remains very weak and stocks risk a significant drop?
Total net assets of money market funds rose to $4.814 trillion in the week ending Jan. 4, according to the Investment Companies Institute. This surpasses his previous peak of $4.79 trillion in May 2020 and dates back to the early months of Covid-19.
These amounts include money market fund assets held by individuals and institutions.
While asset levels for these money market funds are below their year-to-date highs, Wall Street is already noticing a pile of cash.
“Mountains of money!” writes Stephen Sattmeyer, technical research strategist at Bank of America. “While this looks like contrarian bullishness, higher interest rates have made cash holdings more attractive,” he said.
Maintain a holding pattern while earning income
Investors worried about returns and interest rates may be willing to wait before investing in stocks. At the same time, money market funds are actually generating a few percentage points of income for the first time in years.
This means that while investors are waiting for the right time to invest, they may be finding ways to generate profits more safely. Please consider that sweep accounts in which an investor maintains unspent cash balances in a brokerage account may retain those amounts in a money market mutual fund or money market savings account.
Cresset Capital’s Jack Ablin said the change in behavior on money markets reflects a larger shift in the investment landscape.
“Cash is no longer garbage. It pays reasonable interest, which raises the bar that risky assets have to jump to generate additional returns,” Abrin said.
Julian Emanuel, Senior Managing Director of Evercore ISI, said the surge in money markets was a direct result of the sale of stocks at the end of the year.
“Looking at the mid-December flow data, liquidations were on the order of March 2020,” he said. “In the short term, this was a very contrarian buy signal. If the sale continues, they park more.”
In Search of Relatively Safe Yields
Anecdotally, Emmanuel said he sees signs that investors are moving money from low-interest savings accounts to brokerage accounts, which can yield near 4%.
Note that bank-issued money market accounts are insured by the Federal Deposit Insurance Corporation, but money market mutual funds are not.
Still, December inflation rose at an annualized rate of 6.5%, and higher consumer prices have eroded profits.
Ablin said the change in investor attitudes towards money market funds and bonds came with the Fed’s interest rate hike. Since March of last year, the Fed has increased the target rate range for federal funds from zero to 0.25%, 4.25% and 4.50%. These money market funds earned very little interest before the rate hike.
For example, the Fidelity Government Money Market Fund has a compound effective yield of 3.99%. This fund he generated a return of 1.31% in 2022.
Abrin said bonds are becoming attractive again to yield-seeking investors.
“I like the fact that after so many years the bond market has finally taken on a weight of its own.” “From that perspective, you would expect a rebalancing from equities to bonds. They have basically been fighting equities with one hand tied behind their back for over a decade.”