I’m a bit weary of the “dry powder” thesis as an excuse for forecasting more stock gains.
It’s not that I don’t buy it, it’s just generic and tired, and I’ve been over it so many times since 2023 I can barely stand it anymore.
Alas, it’s making the proverbial ’rounds again, so I’ll hit on it. Briefly.
There’s a wall of cash parked in money market funds ($7.67 trillion, according to the latest weekly update from ICI) and as the Fed cuts rates, some of that (note the emphasis) will presumably look for a better return.
I’ve seen the figure below posted on finance-focused social media in recent days. It’s derived from the Fed’s Z.1 data. You take the checkable deposits and currency series, add it to the money market series and divide that sum by the total financial asset series to get the “cash share.”
Beware the axis adjustment. That’s a pet peeve of mine. Sometimes, it makes sense to pinch your y-axis, but most of the time you’re doing it for dramatic effect. In this case, setting the minimum to 3% makes the chart look far more compelling than if you just left it at zero.
Nitpicking aside, 7.5% (household cash as a share of total financial assets in the US) is indeed the highest in decades. Ostensibly anyway, that could be fuel for a stock rally that’s entering its fourth year.
“Despite increased [retail] engagement, households continue to hold near-record cash balances, leaving substantial dry powder should confidence and risk appetite continue to improve,” Citadel’s Scott Rubner remarked, editorializing around what he suggested is a structural shift in individual investor participation.
“Elevated engagement, rising household wealth, broader equity adoption and historically high cash balances together create one of the strongest retail backdrops of the past decade,” he went on.
I won’t argue with that, other than to say it’s a bit too rah-rah for my tastes.
When it comes to money funds, I’ll add two caveats which you can take for whatever they’re worth:
- The entirety of money market fund AUM (i.e., that ~$8 trillion figure I mentioned above) isn’t free to roam, let alone wander off into risk assets like equities.
- Most of that cash — i.e., the portion that’s in government funds — is as safe as any bank savings account. And it’s earning something like 3.75%. It’s not going to just hit the exits for stocks all of a sudden.
