Dollar bills.
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Investor cash holdings are near record highs, and that could be good news for stocks as a wall of money is poised to return to the market.
But here’s the question: Will those investors come back, especially with sentiment still sour and stocks at risk of a selloff?
Total net assets in money market funds rose to $4.814 trillion in the week ended Jan. 4, according to the Investment Company Institute. This surpassed the previous peak of $4.79 trillion during May 2020, back in the months before Covid-19.
That amount includes money market fund assets held by retail and institutional investors.
The level of assets in these money market funds has risen to a high since the beginning of the year, but Wall Street has seen a pile of cash.
“It’s a mountain of money!” writes Bank of America technical research strategist Stephen Suttmeier. “While this may seem contrarian bullish, higher interest rates have made holding cash more attractive.”
Stay in the holding pattern while earning income
Investors, worried about earnings and interest rates, may be willing to wait before putting more money into stocks. At the same time, money market funds actually returned a few percentage points of income for the first time in years.
That means investors can find safer ways to generate some income while waiting for the right time to invest. Consider a sweepstakes account, where investors hold unused cash balances in a brokerage account, placing that amount in a money market mutual fund or money market deposit account.
Jack Ablin of Cresset Capital said the change in behavior towards the money market reflected a larger change in the investment environment.
“Cash is no longer waste. It pays reasonable interest and makes the hurdle higher that risky assets must jump to generate additional returns,” said Ablin.
Julian Emanuel, senior director at Evercore ISI, said the surge into the money market was a direct result of the sell-off in stocks at the end of the year.
“If you look at the flow data for mid-December, the liquidation is in the order of March 2020,” he said. “In the short-term, it’s a very contrarian buy signal. For me, these people basically sold the market at the end of the year, and they just parked in money market funds. If they continue to sell, they will park again.”
The search results are relatively safe
Emanuel said anecdotally, he is seeing signs of investors moving funds from lower-cost savings accounts to brokerage accounts, where yields can be close to 4%.
Note that bank-issued money market accounts are insured by the Federal Deposit Insurance Corporation, while money market mutual funds are not.
Still, with December inflation rising at an annual rate of 6.5%, higher prices for consumers are rising.
Ablin said the change in investor attitudes toward money market funds as well as fixed income comes with the Federal Reserve’s interest rate hike. Since last March, the Fed has raised the target rate of the fed funds rate from zero to 0.25% to 4.25% to 4.50%. These money market funds were earning almost no interest before the rate hike.
For example, the Fidelity Government Money Market Fund has a combined effective yield of 3.99%. The fund generated a return of 1.31% in 2022.
Ablin said bonds have become attractive again to investors looking for yield.
“We are happy that the bond market is finally carrying its own weight after so many years,” he said. “From a perspective, you would expect a rebalance away from equities to bonds. They essentially have been fighting equities with one hand tied behind the back for 10 years or more.”