Financial Planning published, "With $7.7T in Money Markets, Advisors Confront Client Cash Hoarding," which says, "Falling interest rates have advisors confronting a seemingly counterproductive phenomenon: Even as the returns that can be made on cash holdings dwindle, investors keep plowing into money markets rather than stocks and bonds. The research firm Crane Data reported that cash investments in money market funds exceeded $7.7 trillion for the first time. That record was hit even as interest rates on money markets, which typically invest in short-term government and corporate debt, have fallen from offering an average yield of more than 5% as recently as last year to [3.9%] now, according to Crane."
They write, "Investors piled into money markets after the Federal Reserve in 2022 began hiking its key interest rate in a bid to tame inflation. Like many financial products, money markets' rates are tied to that federal funds rate. Peter Crane, the president of Crane Data and the publisher of the Money Fund Intelligence newsletter, said warnings about cash overlook a common tendency in investor behavior. Savers are rarely looking at two distinct types of investment like stocks and money markets and then deciding to put their money into whichever is likely to offer the best yields."
The piece continues, "Rather, they're deciding how much of their portfolio they want to keep in cash and choosing whether that share should be placed in money markets or similar products, most often savings accounts. In other words, 'cash competes with cash,' Crane said. Crane predicted the amount of cash in money markets will easily top $8 trillion before the end of the year. 'Money markets are going to continue taking market share from bank deposits, and not stocks, because the yields on bank deposits still suck,' he added."
It tells us, "Crane, though, thinks such advice will make nary a dent on the money flowing into money markets. He noted that the rates paid on bonds and bank deposits tend to be much more directly tied to Fed policy. Money market yields will eventually come down, too. But they tend to be on more of a lag, Crane said, meaning they will still present an attractive alternative. 'Cash will keep coming into money market funds contrary to Wall Street expectations,' he said."
In related news, the Financial Times published an Opinion piece titled, "Cash Allocations are Not as High as They Look." The piece says, "From The Wall Street Journal, on Saturday: US investors are sitting on a pile of cash. Even with rates now coming down, many are in no rush to move it. Assets in money-market funds reached a record $7.7 trillion last week, with more than $60 billion flowing into those funds during the first four days of the month, according to Crane Data."
They tell us, "That is unlikely to change soon, even with the Fed now cutting rates. Money funds are still yielding a lot more than what they had in the 2010s and early 2020s. There is indeed a lot of money in market funds.... And the number has indeed shot up when real interest rates swung into positive territory in 2022: If American investors do have a lot of money in safe, liquid money market funds, that should be good news for the rally in risk assets. It means that investors still have room to allocate more of their assets to stocks or corporate bonds, and may be more likely to buy the dip rather than panic in a sell-off."
The FT commentary explains, "But the absolute number of dollars in money funds is not relevant; having lots of cash means having lots of cash relative to something else, most importantly relative to riskier assets such as stocks. So what can we compare all those money market assets to? Well, a very rough way to look at it is to compare it to assets in the US stock market. This makes that $7tn-plus look a lot smaller."
It continues, "So we turn to surveys. The American Association of Individual Investors survey asks retail investors about cash allocations. The answers since 1987 are below. Cash allocations are well below average on this measure. Bank of America's Global Fund Manager Survey asks institutional managers about cash allocation. At 3.9 percent, the current level is just low enough to trigger the BofA strategy team's 'cash rule,' a sell signal."
The FT adds, "In short: investors' cash holdings, as proxied by money market assets, is high in absolute terms, but quite low in relative terms. And it is relative terms that matter."
