More than $7 trillion in liquid cash is currently parked in money market funds—amounting to over 11% of total U.S. equity market capitalization. That’s highly unusual. Historically, rising stock prices tend to coincide with declining cash balances, and vice versa, as this chart shows. But not this time. Both equityprices and cash levels have surged to record highs.
This can only mean one thing: equity investors are not fully invested. In fact, the rally since April may be the most hated in recent memory. Professional moneymanagers have largely sat it out, citing a laundry list of macro risks—tradewars, tariff hikes, sticky inflation, slowing growth, and recession fears. Let’s not forget how nearly every major investment bank rushed to call a recession back in April.
For now, money market funds are earning over 4% in nominal returns (and about 2% in real terms). Not bad. But once the Fed begins to cut rates, the calculus changes.
Keep in mind the the old saying: “John Doe can stand on anything—except his neighbor earning double-digit returns and he is making 2% money market rate”.
