'Bullish propaganda' — why you shouldn't expect $6 trillion in money market funds to boost the stock market

Cash dollars and stock market indicators (inflation, economy, crisis, finance)

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• The record $6 trillion in money market funds is not going to flow into the stock market, according to Ned Davis Research.
• The investment firm called the idea "bullish propaganda" because interest rates and equity valuations are elevated.
• "There is no historical evidence to support a shift from money funds to risk assets," it said.

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The record amount in money market funds won't flow into the stock market anytime soon, according to a recent note from Ned Davis Research.

There is $6 trillion sitting in money market funds, which represents a sharp increase over the past few years as interest rates on cash soared. In recent months, Wall Street strategists have argued that those funds will serve as fuel to push the stock market higher as investors look to boost their returns.

But Joseph Kalish, chief global macro strategist at Ned Davis Research, said that as long as money market funds are still yielding around 5%, he isn't buying the hype and instead called it "bullish propaganda."

He looked at the history of fund flows into and out of money market funds and found that there have only been three meaningful declines in money market assets over the past 40 years. They happened in the aftermath of the Great Financial Crisis, following the bust of the dot-com tech bubble, and during the COVID-19 pandemic in 2020.

All three of those instances had one big thing in common: interest rates plummeted as the Federal Reserve was pursuing accommodative monetary policy due to weakness in the economy.

"So, investors were motivated to move out of cash and into higher yielding assets," Kalish said. 

Additionally, the drawdowns in money market funds occurred when valuations in the stock market fell considerably, which likely enticed investors to move out of cash and back into stocks to take advantage of deals in the market.

But neither condition exists today, Kalish added, saying money market returns remain competitive at 5% or more while stock valuations are near all-time highs. 

Finally, he pointed out that the recent surge in money market assets was funded by consumers shifting their deposits out of low-yielding checking and savings accounts held at banks, not from investors selling stocks and moving into cash. 

"The 'money on the sidelines' argument is mostly bullish propaganda in my view. There are reasons to be bullish equities and even credit as we have discussed in recent publications, but the pile of cash is a weak one," he said.

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