Will there or won’t there be a rotation out of money market funds and into stocks?

Maybe that’s a tired debate by now. I’m a little tired of it myself if I’m honest. But don’t expect it to go away anytime soon. Not with more than $6 trillion (total MMF AUM) on the line.

Last week was interesting on the flows front. Both MMFs and equities saw large outflows, with US shares witnessing the most pronounced one-week exodus since December of 2022 ahead of the March FOMC meeting.

Of course, both money funds and US stocks have seen inflows on net for 2024 YTD — sizable inflows at that.

Even after last week’s redemptions, US money funds have taken in a net $160 billion so far this year and US equity-focused ETFs and mutual funds nearly $60 billion.

To reiterate a key point: Only a portion of the cash parked in money funds is available for stock-buying. Corporates, for example, aren’t going to buy equities with their cash, and on the retail/household side of the equation, a meaningful share of MMF inflows since last year are actually diverted savings which fled to government money funds amid the regional bank drama. As discussed here last week, those balances aren’t especially likely to be deployed into risk assets.

And yet, as Goldman emphasized in a new note, inflows to US equity funds have seen “considerable momentum” since the onset of what, by now, counts as one of the more pronounced five-month rallies in history.

The figure on the left, above, uses the same EPFR series from the first chart, only shown in AUM terms. So, US equity-focused ETFs and mutual funds have taken in cash equivalent to 3% of AUM since the rally started in November (it was 4% before last week’s outflow).

That inflow is “just shy of the strongest level since June 2021,” Goldman remarked. The figure on the right above shows the breakdown by sector, style and so on.

Although this debate (cash or stocks?) typically turns on whether, when and by how much the Fed cuts rates (the assumption being that the longer the Committee holds terminal and the longer cash rates stay elevated, the more “sticky” money fund AUM will prove to be), a lot hangs on the macro too.

As the chart shows, an improving macro backdrop tends to facilitate a rotation from cash into equities.

“Historically, periods of strong economic growth and periods of positive economic surprise have each coincided with increased household demand for equities,” Goldman wrote, adding that the same’s generally true when the outlook for the economy’s improving — that’s what the chart tries to capture using ISM new orders.

Still, 5%’s a high bar when there’s no risk involved. “Cash and credit will remain a reasonable alternative to equities in 2024,” the same Goldman piece said, adding that “in absolute terms, cash yields are likely to remain attractive relative to much of recent history [which] may limit household demand” for stocks.

That’s 500 words to reiterate that TINA (the “There Is No Alternative” mantra that drove investors out the risk curve and down the quality ladder in the post-Lehman era) is dead. Just like ZIRP, NIRP and LSAP, the acronyms responsible for TINA’s ubiquity.

Of course, whether you view 5% as a viable “alternative” to stocks in a melt-up depends on your capacity to resist that most notorious (and immortal) market acronym of them all: FOMO.