A golden era for cash may be winding down as the Federal Reserve gets ready to cut interest rates. Many fans of the investment class are staying put anyway.
Assets in U.S. money markets hit a record $6.24 trillion this month, data from the Investment Company Institute showed on Aug. 21, even as markets became increasingly confident that the Fed was gearing up to lower rates at its Sept. 17-18 meeting.
Those reductions are expected to eventually pull yields in money markets down from above 5%, a rate unimaginable a few years ago. So far, however, there is little evidence that individual investors are abandoning cash to chase returns in stocks and bonds. Some $100 billion flowed into money markets in August, according to data analysis firm EPFR.
“We don't feel any need to move our money,” said Vance Arnold, a 71-year-old retired teacher and baseball coach from Fayetteville, Arkansas, who has about 80% of his seven-figure portfolio in money markets and other cash equivalents.
Money-market yields went from near-zero to “4.5%, 4.7%, and now we’re over 5.2%. I can live with 4.5% again," he said.
The durability of money markets is a recent example of how cash has reemerged as an asset class that can compete with stocks and bonds, one of the most striking shifts in the post-COVID investment landscape. Assets in money markets have grown by $313 billion this year, according to Crane Data, which tracks money market funds, despite heady returns in stocks and expectations that the Fed will cut rates.
Cash is seen as one of the safest and most liquid asset classes, boosting its appeal to retirees and investors looking to get paid while staying on the sidelines. Though yields are expected to fall in coming months, projections show them stopping well short of the near-zero levels of a few years ago, when hedge fund legend Ray Dalio famously declared cash “trash”.
Clients are also hanging onto cash because of worries about rich stock valuations following an 18% year-to-date rally that has taken the S&P 500 to record highs, as well as uncertainty ahead of the U.S. presidential election, wealth advisors said.
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