Wary investors are holding about $3.4 trillion in cash, waiting for the right moment to enter the markets. This huge cash stockpile demonstrates investors’ worries amid the Sino-US trade conflict. Nevertheless, some economists argue that excessive cash reserves will drive the stock markets even higher, and the bitcoin and crypto space might also be a beneficiary.
Money-Market Funds Thrive Despite Lower Interest Rates
Money-market funds have expanded by $1 trillion in assets over the last three years, the Wall Street Journal (WSJ) reported, citing Lipper data. This is the highest level since the financial crisis.
For those unfamiliar, a money-market fund invests exclusively in highly liquid assets. Think about cash, cash equivalent securities, and short-term debt securities whose maturity is less than 13 months.
The fact that money-market funds thrive suggests that investors feel safer about holding more cash than ever, as they hesitate to bet on the stock market. Some of them are wary of a supersaturated bull market while others are not confident about the health of the 10-year economic growth.
For instance, money-management firm Farr, Miller & Washington is currently holding twice as much cash as usual. President Michael Farr explained:
Cash always makes me feel good, both having it and seeing it on the sidelines. It keeps things a little bit safer.
Another important driver behind the phenomenon is higher returns in money markets. As of October, money-market funds offered an annual return of 1.6% per year on average. This is way more than 0.02% from eight years ago. The rising yields benefited from Fed’s rate hikes since 2015, but the central bank turned dovish in the last months, showing a preference for aggressive easing.