The growing pile of cash in money market funds should serve as a strong backstop for the stock market in 2024, according to a recent note from Fundstrat’s technical strategist Mark Newton.
The allure of 5% interest rates has led to a surge in money market fund assets this year, with total cash on the sidelines recently reaching a record $5.88 trillion. That’s up 24% from last year, when money market funds held $4.73 trillion in cash.
“While several prominent sentiment polls have turned more optimistic in the last few weeks, this gauge should be a source of comfort to market bulls, meaning that minor pullbacks in the weeks/months to come likely should be buyable given the global liquidity backdrop coupled with ample cash on the sidelines,” Newton said.
He later added, “Funds might begin to deploy cash in the new calendar year once rebalancing takes place, which might help to fuel the market rally even more.”
That would be especially true if the Federal Reserve begins to cut interest rates next year, which the market expects to happen at least five times. If the Fed cuts, the risk-free interest rate on money market funds will fall in tandem, making holding cash a less appealing alternative to putting the money in the stock market.
Ultimately, the growing cash pile suggests that optimism towards stocks isn’t as frothy as it might seem, according to Newton, even as the Dow Jones Industrial Average and Nasdaq 100 hit record highs.
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