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Since the start of the year, much has been made about the ballooning amount of cash sitting in money market funds. By some estimates, that’s now at a record high of $6.5 trillion and it’s often referred to as “cash on sidelines,” implying some level of reluctance to participate in riskier assets.
Throw in recent news that Warren Buffett’s Berkshire Hathaway (NYSE: BRK/B) recently slashed its Apple (NASDAQ: AAPL) stake by 50%, sending the conglomerate’s cash position to a staggering $277 billion, and cash remains alluring. That’s particularly true at a time when the Federal Reserve has delayed lowering interest rates. While that’s likely to change, perhaps next month, the magnitude of rate cuts is unlikely to trigger massive outflows from cash instruments.
All of that is to say that while “cash on the sidelines” is often viewed in a negative light, there’s still ample utility in cash. Of course, advisors know that no client should be 100% allocated to cash and those in younger age brackets should have small cash allocations, but yields still enticing, money markets and the like are useful to an array of clients.
Advisors should also understand why money markets have swelled in size in recent years. The three major catalysts for that exponential increase were the coronavirus pandemic, the Fed’s rate tightening and the spate of bank failures seen in 2023.
What’s Next for Cash, Money Markets?
It’s possible, perhaps likely, that as rates decline, capital will flow out of money markets and cash instruments, but some experts see a return to 2019 levels as unlikely.
“We think money market funds are unlikely to return to their pre-COVID levels of about $4 trillion, even if policy easing begins in September as our economists expect,” notes Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. “They see three 25 basis point rate cuts in 2024 and four in 2025 as the economy achieves a soft landing; and they anticipate a shallow rate-cutting cycle, with the Fed stopping around 3.75 per cent. This means money market yields will likely stabilize around that level, albeit with a lag – but still be attractive versus cash alternatives.”
Even if the Fed speeds along rate cuts, that would likely be in an effort to prop up a softening U.S. economy. In such a scenario, it’d be reasonable to expect many skittish investors to remain in cash of their own volition and for advisors to increase cash holdings within client portfolios in an effort to mitigate risk.
It’s also worth noting that even if the Fed lowered rates tomorrow, that doesn’t mean money market yields will immediately decline. In fact, those drops can be delayed.
“Money market funds can delay the decline in their yields by simply extending the weighted average maturities of their portfolios and locking in current yields in the run-up to the cutting cycle. This makes money market funds more attractive than both short-term CDs and Treasury bills, whose yields reprice lower in sync with rate cuts,” adds Tirupattur.
Don’t Expect Meaningful Money Market Reversion
In a more sanguine climate, it wouldn’t be a stretch to see money markets reverting to 2019 asset levels, but that’s not the hand advisors and investors are being dealt today.
Something else to ponder: as Tirupattur observes, the institutional/retail split in money markets is 61%/37%, so there’s “smart money” sitting in these products. That is to say cash on the sidelines may not be the divisive issue it’s often purported to be.
“While money market fund assets under management have grown meaningfully in the last few years, it is likely to stay high even as policy easing takes hold,” concludes Tirupattur. “Allocation toward risk assets looks to be both lagged and limited. Thus, this 'money on the sidelines' may not be as positive and as imminent a technical for risk assets as some people expect.”
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