$6 trillion Cash Hoard: Fueling U.S. Stock Gains

Discover the potential impact of a $6 trillion cash reserve on market rally as investors seek safe income amidst rising inflation. Data shows record money market fund assets.

Investors are closely monitoring the potential impact of a significant cash reserve on the continued rally of the markets. With nearly $6 trillion parked in money markets and short-term instruments, the surge in yields has attracted a substantial amount of cash as investors sought to secure income in safe vehicles while awaiting the Federal Reserve's response to rising inflation. Data from the Investment Company Institute revealed that total money market fund assets reached a record $5.9 trillion on December 6.

The recent unexpected dovish pivot by the Federal Reserve has the potential to disrupt this trend. If borrowing costs decrease in 2024, yields are likely to follow suit, prompting some investors to redirect their cash into stocks and other high-risk investments. On the other hand, others may opt to lock in yields in longer-term bonds. Historical data from BlackRock indicates that cash has yielded an average return of 4.5% in the year following the last rate hike of a Fed cycle, while U.S. equities and investment grade debt have seen significant gains.

Market activity in the aftermath of the Fed's recent decision suggests that the process of recalibrating portfolios may already be underway. Benchmark 10-year Treasury yields have dropped approximately 24 basis points since the Fed meeting, reaching 3.9153%, the lowest level since late July. The S&P 500 has also experienced a 1.6% increase since the Fed's decision, standing just under 2% below a record high and boasting a year-to-date increase of nearly 23%.

Despite the record-high levels of money market assets, their relative size compared to the S&P 500 is lower than during previous peaks. Currently standing at about 15.5% of market capitalization, this figure is in line with the long-term median and well below the record high of 64% observed in 2009 following the global financial crisis. Notably, investors' appetite for risk has been evident, with traders showing a reluctance to hedge against near-term stock declines, despite historically attractive hedge prices.

The substantial cash reserves in money markets and short-term instruments have the potential to significantly impact the trajectory of the markets. The recent dovish pivot by the Federal Reserve has the potential to prompt a shift in investor behavior, with some directing their cash into riskier investments and others opting for longer-term bonds. The ongoing recalibration of portfolios and the historical performance of various asset classes following Fed rate hikes indicate that the market may be in for a period of significant movement and potential opportunity.