Investors Favor Stocks Over Cash, Marking First Cash Outflows in Eight Weeks

BofA Global Research's report reveals significant cash outflows and substantial inflows into equities, driven by optimism for potential interest rate cuts.

Investors showed a strong preference for stocks over cash in the week leading up to Wednesday, as BofA Global Research reported significant outflows from cash and substantial inflows into equities. According to BofA's report released on Friday, investors withdrew $31 billion from cash, marking the first week of outflows in eight weeks, and allocated $25.3 billion into stocks, based on EFPR data. The report also highlighted that inflows to equities over the past eight weeks amounted to $74 billion, the highest in an eight-week period since March 2022. This trend was attributed to the prevailing optimism surrounding potential interest rate cuts.

At its meeting on Wednesday, the Federal Reserve opted to maintain interest rates as anticipated. However, Chair Jerome Powell indicated that the historic tightening of monetary policy was likely over, as inflation was declining at a faster rate than expected. The report from BofA pointed out that the Fed's decision to project 75 basis points of rate cuts for 2024 was a rare occurrence, with only five instances in the past 90 years when the Fed cut rates while core consumer inflation exceeded the unemployment rate. These instances occurred during the Second World War in 1942 and in four recessions between 1969 and 1981. The Fed's policy decision on Wednesday significantly bolstered a global rally in stocks and bonds, with MSCI's world share index reaching its highest level since April 2022 and poised for a weekly gain of 2.7%, the best performance since the start of November. Additionally, benchmark 10-year U.S. Treasury yields experienced a 32 basis point decline, marking the most significant weekly fall in over a year.

The recent shift in investor behavior towards stocks and away from cash, coupled with the Federal Reserve's indication of potential rate cuts, has contributed to a notable surge in equity and bond prices, reflecting a high level of market optimism.