Cash – a safe way for investors after heavy losses because of stocks

After months of awful days with a sell-off that has gripped global stock markets since the beginning of the year, causing trillions of dollars in capitalization to evaporate rapidly, retail investors are forced to take a completely different view of risky assets and are turning to cash hoarding.

According to data from the Investment Company Institute, since the beginning of the year, nearly $140 billion has been poured into money market funds. After 10 consecutive weeks of receiving massive capital inflows, the total assets held by these funds have reached 1,550 billion USD. In the last 3 weeks, the funds have attracted a total of nearly $36 billion.

Meanwhile, the prolonged and volatile sell-off that enveloped the US stock market caused public companies to lose a total of nearly $15 trillion in capitalization. In September, the S&P 500 closed its longest streak of declines since the 2008 financial crisis.

The reason for the wobble in US stocks is inflation and rising borrowing costs as the Federal Reserve (Fed) shifts its direction to tighten monetary policy. These factors weigh heavily on investor sentiment as well as consumers. And now, more economists are predicting a recession will hit as soon as 2023.

Since the Fed began raising interest rates in March, the return rates of money market funds have steadily increased. This immediately attracted retail investors, especially since the interest rates on savings deposits at major banks such as JPMorgan Chase and Bank of America were almost zero.

Fidelity’s $240 billion money market fund currently has a yield of nearly 2,6%, while Vanguard’s $218 billion fund also has a yield of almost 2,83% this month.

The index of the 100 largest money market funds in the US compiled by Crande Data shows that the yield of funds has increased from a modest 0,02% at the beginning of the year to 2,77% today.

Not only individual investors, but significant asset management funds are also looking to stay out of the market and wait for the bad things to pass. The latest survey conducted by Bank of America showed that in October the share of cash in fund managers’ portfolios amounted to 6,3% – the highest since April 2001.

But even as many see cash as a safe haven, money market funds themselves have withdrawn $87,4 billion since the Fed began raising interest rates. In total, since the beginning of the year, they have withdrawn $250 billion.

Part of the reason is that companies are starting to use the cash they have hoarded in response to the pandemic. Last month, analysts at Goldman Sachs warned that cash at companies (both bluechip firms and companies with lower investment ratings and therefore riskier) was returning to pre-epidemic levels.

“Businesses use the money to pay off debt, reinvest, and with inflation rising, everything becomes more expensive,” said Matt Jones, an analyst at Western Asset Management. “The cost of running 1 business has increased significantly.”

But withdrawals are not a sign that companies are less interested in cash. Instead, there is 1 competition from both non-bank financial institutions that are applying high-interest rates to attract deposits. Some business leaders choose to manage their own cash.

“We see many clients investing on their own rather than through funds, some looking to short-term investment instruments such as bonds, bonds or certificates of deposit,” said John Tobin, chief investment officer at Dreyfus Fund.

Tobin said the strategy doesn’t always work for investors, especially when the Fed raises rates faster than anticipated. The Fed has raised interest rates by 0,75% three times in a row, now the interest rate is already in the range of 3 – 3,25%.

For their part, money market funds have been turning to short-term investments since the beginning of the year. Many funds look to the Fed’s overnight reverse repo — an asset class that only a few banks and hedge funds have access to. With this type, funds will take advantage of high-interest rates as soon as the central bank raises interest rates.

The demand for cash will depend greatly on Fed policy and the degree of volatility of financial markets. Some note that when the Fed decides to control inflation tighter, the attractiveness of cash decreases.

Money market funds have long been unpopular, but managers are wondering if their appeal can last, according to John Croke, a manager at Vanguard. “If inflation remains high then interest rates will continue to rise and money market funds remain attractive,” he said.