Investors Are Hungry for Risk—and Holding Record Cash Sums
Author
Publisher
Date Published

Stocks and bonds have surged in November. With record investor balances in money-market funds, some analysts are optimistic that they have more room to run.

Everything from technology stocks to junk-rated company debt has been rising after an encouraging inflation report reinforced bets that the Federal Reserve can achieve a soft landing by cooling the economy without pushing it into a deep recession.

The S&P 500 is up 8.7% this month, while the Nasdaq Composite has climbed 11%. The yield on the benchmark 10-year Treasury note, which falls as bond prices rise, is down by nearly half a percentage point to 4.483%—a substantial move in a market where daily moves are measured in hundredths of a point.

Investors are plowing cash into stocks and bond funds. Invesco’s QQQ exchange-traded fund, which tracks the tech-heavy Nasdaq-100 Index, reported its largest weekly inflow in history the week of Nov. 13. Funds that track high-yield bond indexes—the higher risk portion of the corporate bond market—reported their two highest weekly inflows on record in the middle of November.

Meanwhile, institutions and investors together have a record $5.7 trillion parked in cash-like money-market funds, many of which are yielding above 5%, according to the Investment Company Institute.

Some on Wall Street see the cash as a bullish signal and a potential tailwind for stocks and bonds if the inflation outlook continues to improve. Others say some of that money has simply shifted to higher-yielding money markets from traditional bank accounts. They question the idea that the money is waiting on the sidelines and ready to enter the market.

Investors trying to gauge the market’s trajectory will be parsing comments this week from three Fed governors for clues on the central bank’s thinking on inflation and the economy. The latest consumer confidence survey is also set for release Tuesday.

“For the first time in a long time, cash is a competitor,” said Ali Dibadj, chief executive of Janus Henderson Investors. “But I think as soon as short-term rates start to tick down, you’re going to see large flows to other assets.”

At retail brokerage Webull, Chief Executive Anthony Denier has seen firsthand the newfound appeal of cash to everyday investors. Webull began offering a 5% yield on cash held at the brokerage earlier this year to remain competitive with money-market funds.

The offering attracted deposits, resulting in much-higher-than-normal cash allocations for Webull customers that Denier said only began to shift this month.

“All that cash that customers have been piling into their brokerage account the last six months to earn yield, they’re finally starting to use it this month and we’re seeing it put into action,” Denier said. “It says to me that retail investors are really bullish.”

Customers have put money into tech stocks, equity index funds and beaten-down small-cap stocks in the past few weeks, Denier said.

Small-cap stocks, which are generally more sensitive to higher interest rates, have trailed large-caps by a historic margin this year. The gap has narrowed in November, with the Russell 2000 small cap index jumping more than 5% on Nov. 14 when the better-than-expected October inflation report was released.

David Littleton, chief executive of asset manager F/m Investments, said he thinks the record sum in money-market funds is contributing to the velocity of the rally in beaten-down assets like small-caps.

“With the new inflation outlook, people either got greedy or they got fearful they were going to miss out on a rally, and you saw a 5% up move in the index,” said Littleton. “There’s definitely some cash waiting for these moments, but I don’t think you’ll see it all move overnight.”

In October, money-market funds posted their first significant monthly outflow since interest rates began rising. Yet with short-term rates still around 5%, sitting in cash is more attractive for many investors than it used to be.

For that reason, David Kelly, chief strategist at J.P. Morgan Asset Management, says he isn’t expecting a mass exodus from money-market funds soon.

“What I see here is a growing realization on the part of individuals and even institutions that there are just better yields to be had in a money-market fund than bank accounts,” Kelly said.