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Cash holdings are close to record highs, and that could be good news for stocks because there’s a wall of money poised to return to the market.
But the question is: Will those investors return any time soon, especially when sentiment is still so sour and stocks are at risk of a sharp sell-off?
Total net assets in money market funds grew to $4.814 trillion in the week ending January 4, according to the report. Investment company institute. That eclipses the previous peak of $4.79 trillion in May 2020, back in the early months of Covid-19.
These funds include money market fund assets held by retail and institutional investors.
Asset levels in these money market funds have fallen to their highest levels since the start of the year, but Wall Street has seen ample cash flow.
“It’s a mountain of money!” Stephen Suttmeier, Bank of America technical research strategist wrote. “While this may seem counterintuitive, higher interest rates have made it more attractive to hold cash.”
Maintain a holding model while still 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 are actually generating a few percentage points of income for the first time in years.
That means investors may be looking for a safer way to make some profits while they wait for the right time to invest. Consider that sweep accounts, in which investors keep unused cash balances in their brokerage accounts, can deposit that money into a money market mutual fund or deposit account. currency market.
Jack Ablin of Cresset Capital said the change in behavior towards money markets reflects a larger shift in the investment climate.
“Cash is no longer trash,” says Ablin. It is paying a reasonable interest rate and so it increases the barrier that risky assets have to overcome to generate additional returns.”
Julian Emanuel, senior managing director of Evercore ISI, said the rise of the crypto market was a direct result of the year-end stock sales.
“If you look at the flow data in mid-December, the liquidations were in the order of March 2020. “In the short-term, that’s a very contrarian buy signal,” he said. I, basically, people are selling the market at the end of the year and they’re just putting it in money market funds. If the selling continues, they’ll park more.”
Relatively safe yield search
Emanuel said he is seeing signs of investors moving money from lower-paying savings accounts to their brokerage accounts, where returns can be as close as 4%.
aware that money market account issued by banks are insured by the Federal Deposit Insurance Corporation, while money market mutual funds are not.
However, with Inflation increased in December at a 6.5% annual rate, higher prices for consumers are negating any benefits.
Ablin said the shift in investor attitudes toward money market and fixed-income funds has also been accompanied by an increase in Federal Reserve interest rates. Since last March, the Fed has increased its fed funds target rate range from 0 to 0.25% to 4.25% to 4.50%. Those money market funds barely made a profit before those rate hikes.
Eg, Fidelity Government Money Market Fund has a gross efficiency yield of 3.99%. The fund generated a return of 1.31% in 2022.
Bonds have become attractive again to investors looking for yields, Ablin said.
“We love the fact that the bond market is finally bearing its own weight after so many years,” he said. “From that perspective, you’d expect a rebalancing from stocks to bonds. They’ve basically been fighting stocks with one hand tied behind their back for 10 years or more.”
