As one parking place for cash clears out, more dollars are being sent back on the road. Guess who’s hitting the gas.
Money-market mutual funds, low-risk investment vehicles that offer higher yields than traditional savings accounts but often require a higher minimum balance, have long been considered a safe haven for cash during uncertain economic times. Watching them can offer a clue as to how much money is flowing into the market because they tend to grow as fear over volatility rises.
Recently, they’ve been shrinking – a sign that investors have been growing more comfortable with higher-risk investments. Total assets in money-market funds fell by $31.3 billion last week to roughly $3.34 trillion, according to the Investment Company Institute’s most recent reading on Nov. 4.
The funds held about $3.16 trillion in January 2008. Over the next year, that number climbed as concern over the market hit a fever pitch. Money market cash reached $3.9 trillion by March 4, 2009, the last reading before the major averages put in their multiyear lows.
Now, it seems investors have grown less hesitant.
“We have a situation where right now, the money is flowing, the dollar is decreasing, so it’s cheap to borrow … so it keeps pulling more and more out,” says Doug Roberts, chief investment strategist, at ChannelCapitalResearch.com.
Of course, it's difficult to extrapolate on the cause of the decline because other factors, such as inflation, affect money-market fund levels, says Marc Pado, U.S. market strategist at Cantor Fitzgerald. Before the recession, in the last decade there might have been around $1.6 trillion in money markets during a bull market and about $2.3 trillion during a bear market, he says.
There’s still more money in money-market funds now than in January of 2008. And market observers are quick to point out that billions are waiting to be put to work. That’s one reason why buying has followed pullbacks in equities.
However, with the S&P 500 index up roughly 50% since the lows in March, it’s easy to see why some traders have grown antsy on the perimeter. Money market cash is down 14% since its March peak. And that money is on the move.
“We’ve seen a steady stream since March of people putting money back to work, and as they go through and obviously are putting that cash back into equities … that’s the fuel for the fire, and that’s a market that has been on fire,” says Pado.
Interestingly, retail investors appear to have been less quick to put money on the sidelines and faster to take it off, according to the ICI data.
Institutional money parked in money-market funds rose roughly 32% -- from $1.93 trillion to $2.55 trillion --between January 2008 and the peak in March, but has decreased only 12% since then. On the other hand, retail cash in money-market funds increased just 11% -- from $1.23 trillion to $1.36 trillion -- in the same period, and has fallen 19% since that peak to just less than $1.1 trillion.
“Retail usually lags, but they were quicker to pull the trigger and get back into this market,” says Pado. “The institutions didn’t believe. They kept seeing the bigger problems down the road, which exist, but they ignored the fact that the sentiment has changed. They’ve been slower to come in, but that’s what’s driving the [market].”
Although the funds haven’t yet fallen to what Pado calls normal levels, they are moving in that direction, he says, adding that investors appear less frightened.
In the long run, there are some questions about the sustainability of the trend. Pado and Roberts see the potential unwinding of the dollar carry trade – which involves shorting the dollar and going long equities – next year or beyond as a possible headwind. That could be a particularly large catalyst if it happens quickly and people are “fleeing for the exits,” Roberts says. Moreover, much of this money might just be being invested overseas; it’s hard to say where it really is or when it might come back out, he says.
In the meantime, there’s still a sense of urgency for those afraid of underperforming benchmarks. “People are throwing in the towel, saying I have to participate in this thing,” says Roberts. Although people are taking profits, “they do it and get right back in,” he says.
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