A Swelling Cash Hoard Will Underpin the Outlook for Stocks
Total money market assets are currently $7 trillion.
Those funds are generating $298 billion in annual interest income.
A better-than-feared economic outlook could encourage more risk taking.
The Federal Reserve has created a massive investor cash hoard…
To say the least, the nerves of Wall Street and Main Street have been frayed. Due to the White House’s ever-changing guidance on tariffs, few people are certain of the outcome. The more the dialogue changes, the harder it becomes to invest.
As a result, money managers and retail investors with short-term horizons have been raising cash. They’d prefer waiting for clarity on the size and number of levies before putting money back to work. By pausing, they can get a better sense of the potential economic growth and corporate profit damage.
Wall Street will be closely watching the developments of next Tuesday. That’s when the White House will announce its reciprocal tariff plans for other countries. The outcome is highly uncertain. Just last week the levies were expected to be onerous. But commentary late yesterday from President Donald Trump suggested a much lower number than anyone expects.
Typically, as the details emerge, money managers’ investing mood improves. As the earlier uncertainty disappears, they can better gauge the fallout for households and businesses. As that happens, all the previously generated cash creeps back into the market.
Well, a better-than-anticipated outcome next Tuesday will come as a huge relief to investors. Not only would the penalties be better than feared, so would the inflation implications. The change would ease economic growth outlook concerns. That would encourage investors with more than $7 trillion sitting in the safety of money market funds to put assets back to work in the stock market.
But don’t take my word for it, let’s look at what the data’s telling us…
To see what I mean, let’s look at money market fund assets. We can follow the weekly fund flows from the Investment Company Institute (ICI). It’s an industry association that represents U.S. asset managers. Its member companies manage more than $30 trillion domestically and almost $9 trillion overseas.
At the start of the COVID pandemic, total money market fund assets were around $3.6 trillion. At the peak, in mid-2020, they got as high as $4.8 trillion. But since then, due to interest rate increases, they've exploded higher. Both institutional and retail investors have taken advantage of the high rates of return. Currently, the two groups have just over $7 trillion parked in these cash-like instruments.
Just over $4.1 trillion on those funds is institutional money…
While the other $2.9 trillion worth of those assets are held by retail investors…
Even though interest rates have dropped, money-market funds still pay a high rate of return. According to consumer-finance website Bankrate, by shopping around, you can earn a yield of between 4.25% and 4.4%. That’s in-line with the 4.3% yield on 10-year U.S. Treasurys, without having to park your money for an extended time.
Now let’s consider the amount of cash the high rate of interest is creating. First, let’s multiply the roughly $7 trillion in money market assets by the 4.25% return. That gets us to just over $298 billion in extra spending power being generated annually. And if we break it down to a monthly number, we get $24.8 billion in interest income. For perspective, money market assets generated several hundred million dollars in extra income prior to the start of rate hikes.
Because of the rapid rise in interest rates, consumer finances will fare better than the central bank expected during its rate hike cycle. Households can withstand higher rates because they're making more money on income investments with high yields.
As a result, all the excess funds being generated will underpin the stock market. You see, eventually, our central bank is going to have to throw in the towel on high borrowing costs. The drivers will be the potential for an economic slowdown, in addition to the massive amount of government debt that needs to be refinanced over the next few years.
When rates start to fall, the payout on money market funds will drop. As that happens, investors who were collecting steady rates of return will seek better opportunities elsewhere. And, if we were to see an extended market drop, the valuation of risk assets should become increasingly appealing. But inevitably, the bulk of that money will be reinvested back into risk assets like stocks.
Five Stories Moving the Market:
President Trump said he would impose 25% tariffs on global automotive imports to the U.S., making good on pledges to penalize foreign makers of cars and trucks – WSJ. (Why you should care – the White House said the levies will start at 2.5% and gradually increase to 25%)
Federal Reserve Bank of St. Louis President Alberto Musalem (hawk, voter) said it’s not clear the impact of tariffs will prove temporary and cautioned that secondary effects could prompt officials to hold interest rates steady for longer – Bloomberg. (Why you should care – Musalem expressed concern inflation could remain stalled above the 2% target longer than previously anticipated)
China’s National Development and Reform Commission has introduced energy efficiency rules for the use of advanced chips that would prevent Chinese companies from buying Nvidia’s best-selling processors in the country if implemented strictly – FT. (Why you should care – China makes up about 13% of Nvidia’s overall revenue)
Minneapolis Federal Reserve Bank President Neel Kashkari (hawk, non-voter) said he's uncertain about the effect of President Donald Trump's tariffs on the U.S. economy, with the possibility that they could push up prices arguing for higher interest rates, and the chance that they could slow economic growth calling for reducing borrowing costs – Reuters. (Why you should care – Kashkari said the two forces should offset one another, suggesting individuals shouldn’t rush to judgement regarding the outcome)
U.S. Trade Representative Jamieson Greer held "candid" talks with Chinese Vice Premier He Lifeng on trade issues during an introductory meeting, Greer's office said; the USTR expressed serious concerns about what he called China’s unfair and anticompetitive trade policies and practices – Reuters. (Why you should care – the discussions are likely an opening foray into figuring out a longer-term solution between the two nations)
Economic Calendar:
Norges Bank (Norway) Monetary Policy Announcement (5 a.m.)
Eurozone - Private Sector Loans for February (5 a.m.)
Eurozone - EU Economic Forecasts (6 a.m.)
U.S. - Initial Jobless Claims (8:30 a.m.)
U.S. - Continuing Claims (8:30 a.m.)
U.S. – GDP (Second Take) for 4Q (8:30 a.m.)
U.S. – Trade Balance (Preliminary) for February (8:30 a.m.)
U.S. – Pending Home Sales for February (10 a.m.)
U.S. – Kansas City Fed Manufacturing Index for March (11 a.m.)
Treasury Auctions $44 Billion in 7-Year Notes (1 p.m.)
ECB’s Schnabel (Board Member) Speaks (1:40 p.m.)
ECB’s Lagarde (President) Speaks (2:05 p.m.)
Fed's Balance Sheet Update (4:30 p.m.)
Fed’s Barkin (Richmond) Speaks (4:30 p.m.)