Trillions in Idle Cash Await Fed Decisions

With money-market fund assets swelling to more than $5.9 trillion, including an increase of about $200 billion over the past month, it is only natural to try to forecast where that mountain of cash might be headed when the happy days of higher savings rates start to fade. 

The challenge of predicting the direction of asset flows out of safe and boring cash accounts comes down to handicapping the makeup of the savers. With yields hovering close to 5% for essentially risk-free exposure, it’s difficult to say whether all that cash belongs to nervous investors seeking temporary shelter, savvy income-hunters or potentially aggressive market timers. 

The truth is probably a healthy blend of all the above. But that doesn’t make it any less fun to predict where such an oversized pile of cash could go once the Federal Reserve starts tinkering with interest rates again. 

Much has been made about the hefty cash accounts being a bullish sign for stocks because of the assumption that the money will all flood into the equity markets when the Fed starts cutting rates. But that assumption misses the point that rate cuts essentially benefit all asset classes. 

Ed Cofrancesco, chief executive officer of International Assets Advisory, believes the movement of cash will be much more diverse.

“The more bearish are focused mostly on bonds,” he said. “Others, believing that we may indeed have achieved a soft landing but are still worried about a correction in equities are utilizing variable annuities that take advantage of the current higher interest rates and offer significant downside protection for equities while allowing upside participation in equity market gains.” 

Bond Market Poised to Benefit 

DoubleLine CEO Jeffrey Gundlach sees all the cash on the sidelines and thinks bonds. 

In his latest outlook, the noted bond fund manager described the record-level cash as “bullish for bonds” because of the logical assumption that someone happy to sit on a comfy 5% risk-free yield doesn’t fit the profile of someone ready to race back into the stock market. 

If history is a guide, and assuming the Fed is finished hiking interest rates in the current cycle, cash will become relatively less attractive from here. 

According to BlackRock, annualized investment returns since 1990 have produced a 21.3% gain for stocks during the periods when the Fed has hit the pause button. Bonds over the same period produced an annualized return of 14.7%, while cash returns hovered at around 5%. 

Most market watchers aren’t calling for a rate cut before the middle of next year, but the BlackRock data shows more good news for stocks and bonds, relative to cash, when the Fed starts pulling back. 

Since 1990, the annualized return of equities six months after the first rate cut was 14.6%. Bonds had an annualized return over the same period of 6.7%, compared with an annualized return of 4.1% for cash. 

Of course, for anyone thinking the Fed might still be in a mood for tightening, the BlackRock data shows cash outperformed bonds during the six months before the last rate hike with an annualized return of 4.4%. 

Stocks had an annualized return of 6.9% over the period dating to 1990, while bonds averaged 1.8%. 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter