Lending Association

Wall Street’s surging stars and staggering cash

Wall Street is record-setting, especially among tech and near-tech stocks. Industrials and financials are sagging, and the Magnificent Seven has become six, with Tesla falling behind Apple (a bit weak as well), Nvidia, Alphabet, Amazon, Meta, and Microsoft (more a ‘Stellar Six’ now than magnificent).

And then there’s Netflix, back among the stars after a solid 2023.

This has seen the S&P 500 rise more than 5% so far in 2024, the Dow up 2.7%, and the Nasdaq has jumped 7%. And over the past year, the S&P 500 is up more than 22%, the Dow has risen nearly 15%, and Nasdaq by a mighty 34%.

So if it’s boom, boom, and a little gloom for equities, why is the amount of cash being held in US money market funds at all-time record highs?

Are the apparent optimists about equities also closet pessimists?

Total US money market fund assets increased by $US16.70 billion to $US6.02 trillion for the week ended Wednesday, February 7, according to the Investment Company Institute (ICI) in a report on Thursday. The ICI collects the data and then sends it to the US Securities and Exchange Commission.

Among taxable money market funds, government funds increased by $US3.71 billion, and prime funds increased by $US12.39 billion. Tax-exempt money market funds increased by $US589 million.

The ICI said that assets of retail money market funds increased by $US13.62 billion to $US2.36 trillion.

And among retail funds, government money market fund assets increased by $US6.29 billion to $US1.53 trillion, prime money market fund assets increased by $US5.68 billion to $US719.16 billion, and tax-exempt fund assets increased by $US1.65 billion to $US109.31 billion.

And big institutional investors are in on the chase as well – assets of institutional money market funds rose $US3.07 billion to $US3.66 trillion.

Among institutional funds, government money market fund assets fell by $US2.57 billion to $US3.36 trillion, prime money market fund assets increased by $US6.71 billion to $US286.93 billion, and tax-exempt fund assets dropped $US1.06 billion to $US10.31 billion.

Since late September, the total amount of cash directed into these funds is up 6.6% or around $US374 billion.

So why? Well, Forbes magazine reported in January that the median money-market fund returned 4.2% over the past year, compared with 0.49% annualized over the 10 years before 2022. (All returns are presented after subtracting annual fees.)

Forbes says that the 100 largest money market mutual funds offer investors a 5.20% average yield, while the average (bank) savings account yields only 0.46%.

And the S&P 500 Dividend yield was 1.47% at the end of 2023, well under the long-term average of 1.84%. Bank of America Global Research said in a note last week (when the total in these funds reached $US6 trillion for the first time) that the “Record high cash levels suggest that investors do not believe in the early 2024 all-time highs on the SPX (S&P 500 Index).

Technical strategist Stephen Suttmeier wrote that the high cash levels also suggest dry powder for buying tactical dips in a bullish backdrop.”

Investors are having a ”$6 trillion dollar love affair with cash,” Suttmeier wrote last week.

What is interesting though is that money market funds usually see a rundown in balances at the start of the year, but so far in 2024, the total is up $US131 billion from the end of December.

That continues the trend over 2023 when money market fund assets rose by over $US1.1 trillion, or 22%, “one of the largest increases seen in the past decade,” analysts at JPMorgan said.

Some analysts think outflows this year will follow any rate cuts from the Fed, but there are lags on yields when rates are on the way down and 4% is still attractive.

Certainly, 2023 saw Warren Buffett and Berkshire Hathaway put money into Treasury bonds and short-term securities for the same reason – 4% plus yields. Not quite the same area of investment, but a very similar sentiment – a bit of safety with a great return.