Many bullish strategists are pointing to an unprecedented $6.9 trillion stashed in money market funds, suggesting it could potentially fuel the stock market. However, this influx of money might not actually be because investors are poised to jump back into stocks.
Right now, those hoping to buy at lower prices aren’t seeing any irresistible deals as the market declines, driven by concerns over slowing economic growth.
Over the past year, Wall Street experts have highlighted a significant factor they believe will continue to propel stocks upward: a massive amount of cash sitting idle. Bank of America reports that money market funds have soared to a record $6.9 trillion. The prevailing idea is that if the stock market takes a noticeable dip, investors will flood back in, using their reserves to prevent any downward spiral from getting out of hand.
This notion gained traction in September when the Federal Reserve lowered interest rates, making cash less appealing to just sit on. The expectation was that lower yields on secure assets would push investors back into the stock market, igniting a new wave of gains. But those expecting a “wall of money” to stabilize the market during its next significant downturn may need to reconsider.
Here’s why this might not play out as anticipated.
According to Jay Hatfield, CEO of Infrastructure Capital Advisors, much of the growth in money market funds is actually due to investors making strategic decisions about where to hold their money. “During this period of increased money market assets, M1 money, which includes checking accounts but not money market funds, dropped by over $2 trillion,” Hatfield explained to BI. This suggests the shift was more about optimization rather than a move away from risk.
Put simply, investors have been capitalizing on the 5% yields offered by money market funds, migrating their cash from low-yielding bank accounts. As long as these cash yields remain attractive, it’s unlikely that this sidelined cash will venture elsewhere.
And even if these yields were to plummet to zero, it would likely indicate broader economic troubles, deterring investors from exchanging their risk-free cash for the volatility of the stock market.
Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, believes that even at a record $7 trillion, this cash isn’t particularly remarkable when viewed in context. Tentarelli’s analysis shows that while the nominal amount reaches new heights, money market cash has been decreasing relative to the total market capitalization of the S&P 500.
For Tentarelli, this data point is ultimately just a distraction. “I’m not convinced we’ll see a flood of cash moving into equities from money market funds,” he shared in an email to BI. He suggests this “dry powder” shouldn’t be necessarily seen as bullish or bearish.
Yet some investors are prepared, waiting with cash to capitalize on any major market dip. Ben Hunt, an investor from Kentucky, mentioned earlier this month that he perceives the stock market as overripe for a correction, with investor exuberance appearing just as a market peak nears. “I’m planning to have up to 50% in cash by the quarter’s end,” Hunt revealed, noting that he’s already at 30% cash.
Hunt is strategically holding back, ready to buy more significantly if the market drops to more appealing levels. But for now, those eyeing dips don’t see any enticing offers as the stock market slides with concerns about slowing economic growth.
The S&P 500 and Nasdaq 100 have dipped 4.5% and 7.5%, respectively, since their mid-February peaks, with no notable recovery so far.
