Is Now the Time to Move Out of Cash?

With an estimated $6.4 trillion sitting in money market funds, one could easily view that as a kind of insurance policy for the stock and bond markets as the likely recipients of inflows once cash starts to move off the sidelines.

The question is, when does that start to happen and what forces will it take to jar the inertia of those savers still soaking respectable yields for very little risk?

Many of the most tuned-in market watchers say, don’t hold your breath.

While cash accounts have doubled over the past four years as the Fed pushed up rates in its knee-jerk reaction to the Covid pandemic economic shutdowns, there has always been a level of stickiness to idle money, especially when the yields are good.

“A significant portion of that cash will never make its way into the equity markets, and we know that by looking at the history of cash on the sidelines,” said Paul Schatz, president of Heritage Capital in Woodbridge, Conn.

“For investors to engage in risk, they need to feel like the reward far outweighs the risk, and soaring gold, strong crypto and fresh all-time highs in the stock market aren’t doing that yet,” he added. “Anecdotally, I know investors are also waiting for the election to be over, which is a categorically dumb decision.”

Sitting in Money Market Funds

Karen Veraa-Perry, Head of iShares Fixed Income Strategy, sees interest rates and the direction of the Fed’s monetary policy as a potential release valve for all those bloated cash accounts.

“We typically don’t see money move out of money market funds until we see a few rate cuts,” she said.

The Fed’s overnight rate of between 4.75% and 5% is still too high to force a major cash allocation into bonds, said Veraa-Perry, who described a 3% Fed rate as the “tipping point.”

Jen Wing, chief investment officer at GeoWealth in Chicago, said the cash allocations that made so much sense in 2023 will start making less sense in 2025 and beyond.

“We think investors who are still holding money markets and cash equivalents should consider the opportunity cost of doing so into 2025,” she said. “In this environment, there may be better options for investors with room to move out the risk spectrum.”

Veraa-Perry agrees.

Citing the new money market fund rules that make yields adjust more quickly to Fed rate adjustments, Veraa-Perry said investors holding cash will miss out on potential price appreciation of bonds when rates are cut.

“We’ve been advocating for the past year an allocation to the belly of the bond curve,” she said. “The 3- to 7-year Treasury is where you will see the most price appreciation as interest rates come down.”

Stephen Carrigg, director of investment analysis at Integrated Partners in Waltham, Mass., uses a bucket strategy to help clients manage cash allocations, which he believes helps investors keep cash in perspective.

“If they will need cash to fund expenses in the next year or two, maybe holding cash is the right investment,” he said. “But if they do not need the cash for 10 or more years, holding just cash is likely not the best decision.”