Will record-high money market fund AUM be deployed into equities now that the Fed’s cutting rates?
Wait, that’s not bombastic enough. Let me dramatize it for you.
With cash yields set to drop precipitously, will the Everest-tall mountain of money sitting “idle” on the sidelines serve as a source of funds for an epic, FOMO rally that sees the S&P gallop higher into year-end and beyond?
I’m so tired of that question, however posed, I can barely stand to address it anymore. The answer — my answer — goes as follows. I don’t know. And I don’t care. Not even a little bit.
But that won’t work, will it? I gotta entertain the masses! And so I shall.
According to the latest from Goldman’s David Kostin, history doesn’t support the notion that investors will rush off the sidelines and into stocks just because yields on cash are set to recede. (Don’t tell Scott Rubner, David.) The figure on the left, below, uses EPFR’s data for US MMF assets (as opposed to ICI’s). There’s nearly $8 trillion in ostensible dry powder sitting around.
The chart on the right (click to enlarge, as always) will be déjà vu to anyone familiar with Goldman’s top-down equity research. Kostin’s used some version of it on so many occasions I can’t even begin to remember them all.
There really isn’t a lot to know here: Whether or not equity funds see inflows following Fed cuts depends on whether the US economy heads into a recession thereafter. When the Fed’s cutting rates, they’re very often doing so for a reason, which is to say the economy’s faltering. In those instances, the safe-haven appeal of cash can offset lower yields when it comes to attracting AUM. In cases where the Fed cuts rates and the economy holds up, maybe people “trade” some cash for risk assets.
Here’s the math. Soft landing = stock inflows. Recession = stock outflows. If past is precedent. And with the caveat that we’re only talking about the ensuing 12-month period after the first cut.
Could’ve surmised that on your own? Well, congratulations! You’re a Wall Street equity strategist. Feel free to quit your current job, show up in Manhattan and demand your half-million dollar salary, bonus, stock options and your complimentary team of pre-hazed research associates (while supplies last).
Oh, and do note from Exhibit 2 that n=8 here. If you’re a college prob and stats instructor struggling to make it on $65,000, feel free to laugh in your basement office. Or cry on the way home in your five-year-old Honda Accord.
“pre-hazed” – Ha!
I prefer my research associates “post-hazed”
Before I read the comments I was going to mention the haze.
I would kill for pre hazed associates.
I think the only useful clue on cash available and likely* to be re-allocated to investments is the “cash percent” reported in various investor surveys e.g. BAML’s.
I guess I am an ass who is part of the masses.
I am closer to the $65,000 mark than the $500,000 mark per year, but I do not find it a struggle to live at that level. So I will cry over the 11 year old Mazda 3 I gave up for a new electric vehicle. I do have fond memories of that car and it’s predecessor a Mazda Protoge. In all I drove mazda gas burners for over 20 years. I traded down to a new Hyundai Ioniq 6 with a misfit hood, 2 years complimentary charging. I got $20K in government and Hyundai incentives to help my purchase along.
I do feel entertained by the article however including the obligatory chart and historical probability analysis.
Thank you.
The Ioniq 6 was on my shortlist (I ultimately went with Polestar). It sounds like you’re not too happy with it?
So much cash out there!!
It seems like both higher rates and lower rates can drive different parts of the economy- so, therefore, short of a recession – the S&P 500 will continue to hoover up that cash.
Regardless of the election outcome, fiscal stimulus and more government jobs will be part of the economic outlook (at least for the next 4 years), so I am thinking that the stock market will benefit from “trickle up” economics.
Much of the cash held in mmf is disintermediated from the banks. Many large money center banks pay very low rates, far below mmfs. That money may head back to the banks. Some will go into bonds when the short end of the curve ‘disinverts’. A fairly small amount of it may go into stocks. Don’t hold your breath.
Another problem with the “cash coming off the sidelines” argument which has always bugged me is that the assets backing those money market funds have to be held by someone. It’s not like I cash out $10,000 from my MMF to buy NVDA shares and the fund manager sends the equivalent amount of T-bills back to the US Treasury. “Hey, we don’t need these any more, you can have them back.” Those bills get sold, and the cash to buy them has to come from somewhere.
I’ll wager that a good amount of that “cash” is being held by corporations vs private mom and pop types.