Dollar banknotes.
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Investor money holdings are near record highs, and that may very well be excellent news for stocks since there may be a wall of cash ready to return right back into the market.
However the query is that this: Will those investors return any time soon, especially with sentiment still so sour and stocks liable to a serious selloff?
Total net assets in money market funds rose to $4.814 trillion within the week ended Jan. 4, in response to the Investment Company Institute. That eclipses the prior peak of $4.79 trillion during May 2020, back in the sooner months of Covid-19.
These sums include money market fund assets held by retail and institutional investors.
The extent of assets in these money market funds has come off the highs because the start of the yr, but Wall Street has already noticed the money pile.
“It is a mountain of cash!” wrote Bank of America technical research strategist Stephen Suttmeier. “While this seems contrarian bullish, higher rates of interest have made holding money more attractive.”
Staying in a holding pattern while earning income
Investors, nervous about earnings and rates of interest, could also be willing to attend before they put more cash into stocks. At the identical time, money market funds are literally generating a couple of percentage points of income for the primary time in years.
Which means investors could also be finding a safer strategy to generate some return while they wait for the appropriate moment to take a position. Consider that sweep accounts, where investors hold unused money balances of their brokerage accounts, can park those amounts in money market mutual funds or money market deposit accounts.
Cresset Capital’s Jack Ablin said the change in behavior toward money markets reflects a much bigger shift within the investing environment.
“Money isn’t any longer trash. It’s paying an inexpensive interest and so it makes the hurdle higher over which the dangerous assets should jump to generate a further return,” Ablin said.
Julian Emanuel, senior managing director at Evercore ISI, said the surge into money markets was a direct results of selling stocks at yr end.
“In the event you take a look at the flow data for the center of December, liquidations were on the order of March 2020,” he said. “Within the short-term, it was a really contrarian buy signal. To me this was people principally selling the market at the tip of the yr, they usually just parked it in the cash market funds. If the selling continues, they’ll park more.”
Seeking relatively protected yield
Emanuel said anecdotally, he’s seeing signs of investors moving funds from their lower paying savings accounts to their brokerage accounts, where the yields will be near 4%.
Bear in mind that cash market accounts issued by banks are insured by the Federal Deposit Insurance Corporation, while money market mutual funds will not be.
Still, with December’s inflation rising at a 6.5% annual rate, higher prices for consumers are chiseling away at any gains.
Ablin said the change in investor attitudes about money market funds and likewise fixed income got here with Federal Reserve rate of interest hikes. Since last March, the Fed has raised its fed funds goal rate range from zero to 0.25% to 4.25% to 4.50%. Those money market funds barely generated interest prior to those rate hikes.
As an example, Fidelity Government Money Market Fund has a compounded effective yield of three.99%. The fund generated a 1.31% return in 2022.
Ablin said bonds have turn out to be attractive again for investors in search of yield.
“We just like the undeniable fact that the bond market is finally carrying its own weight after years and years,” he said. “From that perspective, you’ll expect a rebalance away from equities into bonds. They’ve essentially been fighting equities with one hand tied behind their back for 10 years or more.”