“Cash” had a helluva year. Perhaps you’re aware.
Every week, I editorialize around the latest flows data for money market funds, and more often than not in 2023 that meant trying to conjure new ways to say the exact same thing: AUM hit another record.
Eventually, I grew tired of paraphrasing myself. “Another week, another new all-time high” became the standard, tired refrain.
Last week was no exception. Money fund assets hit $5.763 trillion after taking in another $29 billion.
The inflow ahead of the US holiday pushed the cumulative total for this year above the $1 trillion mark.
One narrative says that’s “dry powder” for stock-buying, or at least for risk-taking. The Wall Street Journal over the weekend ran a feature piece suggesting just that. “Some analysts see the investor balances in money-market funds as a bullish sign for stocks and bonds,” the article said.
It’s easy enough to make the case for bonds. All “still resilient” narratives aside, recessions do happen eventually, and the US labor market is virtually guaranteed to be softer in 2024 than it was in 2023, which could undercut spending and so on. The weaker the economy, the better the outlook for duration. Bonds could post equity-like returns in 2024, and that’s not lost on most investors.
The case for stocks is less clear for any number of reasons, one of which is simply that bonds and, yes, money market funds, are a compelling alternative.
Importantly: Household equity allocations aren’t exactly conservative. “Households’ demand for yield-bearing assets has not driven significant equity net selling so far this year,” Goldman’s David Kostin wrote last month. “Households appear to have financed purchases [of money market funds] using checking and savings balances.”
Households, Kostin went on to say, “are already heavily invested in equities.” As the table shows, their allocation ranks in the 96%ile going back seven decades.
You can make a decent case for equities headed into the new year, but whatever they are, stocks aren’t a screaming bargain. And that raises questions about the idea that investors — “households” or otherwise — will be quick to go all-in.
“Yield-bearing assets such as three-month Treasury bills and investment-grade corporate bonds have become considerably more attractive than two-years ago [while] equity valuations on an absolute and relative basis have actually become less attractive,” Goldman analysts including Kostin wrote, in their year-ahead outlook for US stocks.
Stocks, the bank reminded investors, “offer the narrowest risk premium relative to 10-year Treasury notes in more than 20 years.”
If you ask Goldman, higher yields in cash, bonds and credit will tempt households to buy yield-bearing assets instead of equities. “We forecast in 2024 they will be net sellers of stocks for a second consecutive year,” Kostin said, adding that “the new interest rate regime has led to a clear shift in the asset allocation calculus for households.”
So, if you ask Kostin, the rotation is more likely to go in the other direction: From stocks into bonds, credit or more cash.
Needless to say, that’s not deterministic by any stretch. It’s just a forecast, nothing more, nothing less. I highlight it not necessarily to throw cold water on the idea that record-high money market fund assets may presage a stock-buying frenzy under the right circumstances, but rather to reiterate a simple and, I hope, familiar point: There is an alternative to stocks now. “TINA” is dead.
