Some analysts see the investor balances in money-market funds as a bullish sign for stocks and bonds ILLUSTRATION BY ALEXANDRA CITRIN-SAFADI/THE WALL STREET JOURNAL By Jack Pitcher Nov. 26, 2023 5:30 am ET 250 Stocks and bonds have surged in November. With record investor balances in money-market funds, some analysts are optimistic that they have more room to run. Everything from technology stocks to junk-rated company debt has been rising after an encouraging inflation report reinforced bets that the Federal Reserve can achieve a soft landing by cooling the economy without pushing it into a deep recession. The S&P 500 is up 8.7% this month, while the Nasdaq Composite has climbed 11%. The yield on the benchmark 10-year Treasury note, which falls as bond prices rise, is down by nearly half a percentage point to 4.483%—a substantial move in a market where daily moves are measured in hundredths of a point. Total money-market-fund assetsSource: Investment Company Institute Jan. 2022'234.04.55.05.5$6.0trillion Investors are plowing cash into stocks and bond funds. Invesco’s QQQ exchange-traded fund, which tracks the tech-heavy Nasdaq-100 Index, reported its largest weekly inflow in history the week of Nov. 13. Funds that track high-yield bond indexes—the higher risk portion of the corporate bond market—reported their two highest weekly inflows on record in the middle of November. Meanwhile, institutions and investors together have a record $5.7 trillion parked in cash-like money-market funds, many of which are yielding above 5%, according to the Investment Company Institute. Some on Wall Street see the cash as a bullish signal and a potential tailwind for stocks and bonds if the inflation outlook continues to improve. Others say some of that money has simply shifted to higher-yielding money markets from traditional bank accounts. They question the idea that the money is waiting on the sidelines and ready to enter the market. Investors trying to gauge the market’s trajectory will be parsing comments this week from three Fed governors for clues on the central bank’s thinking on inflation and the economy. The latest consumer confidence survey is also set for release Tuesday. “For the first time in a long time, cash is a competitor,” said Ali Dibadj, chief executive of Janus Henderson Investors. “But I think as soon as short-term rates start to tick down, you’re going to see large flows to other assets.” At retail brokerage Webull, Chief Executive Anthony Denier has seen firsthand the newfound appeal of cash to everyday investors. Webull began offering a 5% yield on cash held at the brokerage earlier this year to remain competitive with money-market funds. The offering attracted deposits, resulting in much-higher-than-normal cash allocations for Webull customers that Denier said only began to shift this month. “All that cash that customers have been piling into their brokerage account the last six months to earn yield, they’re finally starting to use it this month and we’re seeing it put into action,” Denier said. “It says to me that retail investors are really bullish.” Customers have put money into tech stocks, equity index funds and beaten-down small-cap stocks in the past few weeks, Denier said. Small-cap stocks, which are generally more sensitive to higher interest rates, have trailed large-caps by a historic margin this year. The gap has narrowed in November, with the Russell 2000 small cap index jumping more than 5% on Nov. 14 when the better-than-expected October inflation report was released. David Littleton, chief executive of asset manager F/m Investments, said he thinks the record sum in money-market funds is contributing to the velocity of the rally in beaten-down assets like small-caps. “With the new inflation outlook, people either got greedy or they got fearful they were going to miss out on a rally, and you saw a 5% up move in the index,” said Littleton. “There’s definitely some cash waiting for these moments, but I don’t think you’ll see it all move overnight.” In October, money-market funds posted their first significant monthly outflow since interest rates began rising. Yet with short-term rates still around 5%, sitting in cash is more attractive for many investors than it used to be. For that reason, David Kelly, chief strategist at J.P. Morgan Asset Management, says he isn’t expecting a mass exodus from money-market funds soon. “What I see here is a growing realization on the part of individuals and even institutions that there are just better yields to be had in a money-market fund than bank accounts,” Kelly said. https://www.wsj.com/finance/stocks/...ng-record-cash-sums-6fe43275?mod=hp_lead_pos1
Always funny how even financial reporters don’t know how any of this stuff works. The cash is there because the Fed printed it during QE to buy bonds; it’s going to stay there until the Fed takes it back. Swapping Person A’s cash for Person B’s shares means there is precisely the same amount of cash in the system as before.
no. The cash is there because investors are saying they are willing to put it to work while the market is rising. What else makes the market rise except cash on the sidelines. When the market starts selling off that cash magically evaporates. It’s a tale as old as time and has nothing to do with QE.
Fund managers are hungry to keep pace with the market so that they can keep their job. I think that most people are fine with 5-6% risk free yield.
I suspect you are confusing cash holdings or cash percentages held by specific funds or investors with what the WSJ article is discussing, which is total aggregate cash in the system - measured by excess bank reserves, or in this case MMF balances. Obviously it's possible for specific market players to be sitting on lots of cash, amounting to dry powder or potential demand in a particular market. Also, stuffing more cash into the system raises equity prices (all things being equal) due to the portfolio balance effect. However, the total numeric quantity of cash in the system is set by the Fed. The Fed buys a security by printing cash (Federal Reserve Notes) and said cash must be held by somebody until the Fed retires it by selling a security, or allowing one to mature without reinvestment. The trillions of dollars sitting as excess bank reserves and MMF balances is because the Fed bought trillions of dollars in bonds over the past 15 years. If they had not done so then reserve and MMF balances would be lower by $5 trillion (or whatever) and public holdings of Treasury bonds and MBS would be higher by $5 trillion.
The argument about how there's excess cash on the sidelines always comes up when the markets are rallying. Somehow that cash evaporates when there's a big sellofff. I've heard that argument for a decade prior to QE.
Correct me if I'm wrong, but I remember reading that during the AMC or maybe GME craze, it was the option buying that was causing the squeeze. Its much cheaper to just buy an option, and then let the MM have to hedge with buying the stock, correct? So it perhaps doesn't take a lot of cash to force the market higher. Can this be accounted for by digging into the Call/Put volumes?