The golden era for cash might be coming to an end as the Federal Reserve prepares to reduce interest rates. Despite this, many enthusiasts of this investment category remain steadfast. According to data from the Investment Company Institute on August 21, assets in US money markets reached an all-time high of $6.24 trillion last month, even as market confidence grew that the Fed would decrease rates at its September 17-18 meeting. These rate cuts are anticipated to eventually lower yields in money markets from above 5 percent, a rate that was unimaginable just a few years ago.
However, there is currently no significant evidence that individual investors are shifting away from cash to pursue returns in stocks and bonds. Data analysis firm EPFR reported an inflow of $100 billion into money markets in August. Vance Arnold, a 71-year-old retired teacher and baseball coach from Fayetteville, Arkansas, who has approximately 80 percent of his seven-figure portfolio in money markets and other cash equivalents, stated, "We don’t feel any need to move our money." Money-market yields have risen from near-zero to over 5.2 percent, and he is content with yields around 4.5 percent.
The resilience of money markets is a recent demonstration of how cash has re-emerged as a competitive asset class against stocks and bonds, marking one of the most significant shifts in the post-Covid investment landscape. Despite impressive returns in stocks and expectations of Fed rate cuts, assets in money markets have increased by $313 billion this year, according to Crane Data, which tracks money market funds. Cash is considered one of the safest and most liquid asset classes, enhancing its appeal to retirees and investors seeking steady returns.
Although yields are expected to decline in the coming months, they are projected to remain well above the near-zero levels of a few years ago, when hedge fund legend Ray Dalio famously deemed cash "trash." Wealth advisors note that clients are holding onto cash due to concerns about high stock valuations following an 18 percent year-to-date rally that has pushed the S&P 500 to record highs, as well as uncertainties surrounding the upcoming US presidential election.
However, investors holding excessive cash could miss out on the superior returns typically offered by other asset classes. A study by Hartford Funds revealed that cash has averaged a 2 percent return in the 12 months following the start of Fed rate cuts, while stocks returned 11 percent and Treasury bonds gained 5 percent. Anne Marie Stonich, chief wealth strategist at Coldstream Wealth Management in Seattle, has been encouraging clients to move out of cash and into assets like government bonds, where they can secure yields by holding the securities to term. Despite resistance from cash-loving investors, she emphasizes the need to reconsider cash holdings.
Investors’ commitment to cash could be tested if a weakening economy leads the Fed to cut rates more rapidly or deeply than anticipated. Such a scenario could increase the attractiveness of safe-haven assets if concerns about economic growth trigger a stock market selloff. Traders will closely monitor US employment data on September 6 to assess whether the labor market weakness that affected markets in late July and early August has subsided. Futures linked to the Fed’s main policy rate indicate that markets are pricing in about two percentage points of rate cuts over the next year.
The latest inflows into money-market funds include funds from institutional investors aiming to secure yields before Fed rate cuts, according to EPFR’s data. Cash is also favored by individual investors, who account for over $4 trillion of the funds currently in money markets, based on data from the Federal Reserve Bank of St. Louis. Judith Astroff, a 75-year-old systems analyst in New York, estimates that 15 percent of her $500,000 retirement account is in money markets. Despite her experience with high-risk investments, she prefers the stability of cash over the volatility of stocks or the commitment required by longer-term US government bonds.
Brian Nick, head of portfolio strategy at NewEdge Wealth in Stamford, Connecticut, aims to persuade clients to diversify their investments if yields decline as expected in the coming months. He emphasizes the need to convince investors of the benefits of moving away from money markets while highlighting the advantages of other assets. This approach is likely to prevail in the long run.
