The Cash Hoard of 2023 And the Sideline Money Myth

The vast  has the bullish media salivating about what it means for the future of equities. That cash hoard in money market funds now exceeds $5.2 trillion.

Such has brought forth the age-old narrative that the money on the sidelines is set to come into the markets. However, they don’t tell you those funds have accumulated since 1974. Correctly, in the aftermath of crisis events, some of these assets rotate from ‘safety to ‘riskbut not the degree commentators suggest. Interestingly, such did not occur following the pandemic-related crisis.

Money Market Funds Vs SP500

This is the ‘

– Clifford Asness:

Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. Since this is required for market equilibrium, there can be no

Think of this dynamic as you would a football game. Each team must field 11 players despite having over 50 players. If a player comes off the sidelines to replace a player on the field, the substituted player will join the other sidelined players’ ranks. Notably, at all times, there will only be 11 players per team on the field. Such holds equally true if teams expand to 100 or even 1,000 players.

So, while thehas swollen in recent years, there are two important points to consider in the current environment.

Why Take the Risk?

Following the financial crisis, Ben Bernanke dropped the Fed funds rate to zero and flooded the system with liquidity through ‘ As he noted in 2010, those actions would boost asset prices, lifting consumer confidence and creating economic growth. By dropping rates to zero, ‘rates also dropped toward zero, leaving investors little choice to obtain a return on their cash.

Today, that narrative has changed with current  yields above 4%. Historically, there were periods when one could stick money in a ‘ account and earn enough return without taking risks. In other words, it was possible to ‘ your way to retirement.

The chart below shows the savings rate on short-term deposits versus the equity-risk premium of the market.

Savings vs Equity Risk Premium

One of the problems with the is there is currently no incentive to reverse those savings intounless the Fed is dropping rates and reintroducing ‘owever, as discussed in ‘‘ if the Fed reverses to a more accommodative policy, it is because they have ‘Such will not be the time to take on more risk, but less.

Furthermore, despite the high money market account balances, investors have very low cash balances relative to the current equity exposure. As asset prices escalated since the Financial Crisis, supported by successive rounds of monetary policy, investors were trained to chase risk. While equity-to-cash ratios peaked in 2022, they remain at historically high levels.

Equity to Money Market Ratio

Furthermore, retail investors have very little cash in money markets to invest.

Retail Money Market To Equity Ratio

Professional mutual fund managers are also holding near record-low levels of cash.

Mutual Fund Cash Levels

In fact, what is interesting is that historically, although higher rates attracted savings, the subsequent rate decline did not create massive outflows.

Money Market Funds vs Fed Funds Rate

There is a reason for that.

Corporate Coffers

So, if it isn’t retail or professional investors, who are holding this $5 trillion cash hoard? The following chart breaks down money market funds by type.

Money Market Funds by Type

Looking at the chart above, you will notice that the bulk of the money is in government money market funds. Those particular money market funds generally have much higher account minimums suggesting the funds are not retail investors.

As noted, much of the ‘is held by corporations. As we said in ‘that isn’t a surprise:

Not surprisingly, as of the end of 2022, with CEO confidence near record lows, the money spent on buybacks slowed, and the cash hoard swelled as mergers and acquisitions declined.

CEO Confidence as of Q4 2022

Until the economic environment improves, those cash hoards will unlikely revert anytime soon.

Future Returns May Be Lower

As discussed in ‘

Average Annual Returns By Period

Of course, those excess returns were driven by the massive floods of liquidity from the Government and the Federal Reserve, including trillions in corporate share buybacks and zero interest rates. Since 2009, there has been more than $43 Trillion in various liquidity supports. To put that into perspective, the inputs exceed underlying economic growth by more than 10-fold.

Government Interventions vs The Stock Market

However, given an equal choice between ‘ and ‘ returns, such extracts buyers from the market and lowers potential price appreciation. In other words, as long as savings rates remain elevated, future stock market returns will likely be lower than over the past decade.

With net exposure to equities by professional and retail investors still near historically high levels, it suggests there is not an exceeding amount of buying power to push markets substantially higher.

It is a foregone conclusion that the Fed will eventually cut rates drastically due to a financial crisis or a recession. However, as noted above, that does not mean the $5 trillion ‘will come flooding back into the equity markets. back into the markets. That will ultimately be an issue of confidence.

So, the next time you hear someone talk about ‘money on the sidelines,’ just remember that it really isn’t on the sidelines.

More importantly, if you expect a return to the ‘ you may be disappointed.


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