The Record $6 Trillion in 'Cash on the Sidelines' Won't Help Fuel Stocks' Rally, Analysts Say

A substantial accumulation of cash currently resides in U.S. money-market funds, prompting some on Wall Street to speculate that this liquidity represents untapped potential, eagerly awaiting deployment in the stock market. However, a closer examination of the situation reveals a more nuanced reality that might not align with the optimistic expectations of bullish investors, as articulated by MarketWatch’s Brett Arends in what he described as a prevailing market myth.

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Contrary to the belief in a historical abundance of sidelined cash poised to flood the stock market, Morningstar’s Sylvester Flood challenges this notion as a misconception. Despite a notable inflow of $1.2 trillion into money-market funds since October 2022, driving their total assets to an all-time high exceeding $6 trillion, the proportion of cash in these funds relative to the investable universe of risky assets has not experienced significant change.

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Data from Morningstar Direct reveals that, at the end of January, assets in money funds accounted for approximately 23% of long-term assets. This figure only slightly surpasses the 20% average recorded since 2011. Flood emphasizes that, in reality, money markets, as a percentage of risky assets, are within the normal range. This is a far cry from the 2008 financial crisis when the ratio reached an elevated 63%.

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The relatively stable proportion is, in part, attributed to the substantial increase in U.S. stock values over the past year. According to Morningstar’s U.S. market index, stocks have surged by 25% in the last 12 months. Additionally, the rate of cash flowing into money-market funds has tapered off. While a noteworthy $123 billion entered these funds in January, the inflow dwindled to a mere $33 billion in February. Despite this, money-market funds are still on track to amass $1 trillion in assets this year, albeit falling short of the record-breaking haul in 2023, according to Flood.

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Flood is not alone in dispelling the notion that a surplus of "cash on the sidelines" could significantly uplift stock prices. In January, Joseph Kalish, chief global macro strategist at Ned Davis Research, dismissed this idea as "propaganda." Drawing from evidence spanning the past 40 years, Kalish demonstrated that major reductions in money-fund assets typically coincided with bear markets for stocks, driven by Federal Reserve interest rate cuts aimed at stimulating the economy, thereby diminishing the appeal of money funds.

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While there are various reasons for investors to maintain a positive outlook on both stocks and bonds, Kalish cautioned against relying on the belief that money-fund investors will come to the rescue, characterizing it as a weak argument.

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On Monday, U.S. stocks mostly experienced declines, with only the Dow Jones Industrial Average managing slight gains after its most substantial weekly drop since October. The S&P 500 fell by 0.1% to 5,117.94, while the Nasdaq Composite shed 0.4% to 16,019.27. Despite these fluctuations, all three benchmarks remain in close proximity to their record highs.

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