Money Markets Are Still Having a Moment

Just like ABBA said, “Money, money, money, must be funny,” but it’s still where risk-averse retail investors are parking their wealth. 

Retail investors have accumulated more than $3 trillion in money market funds, according to the Investment Company Institute. Money market funds, while not yielding the 5% that they were a few years ago, are still keeping pace with inflation, with a rate hovering around 3.5%. Concerns about equity volatility and geopolitical uncertainty are rife, and bonds aren’t looking too hot, with the Bloomberg US Aggregate Bond Index in the negative so far this year. That makes money market funds an obvious choice for conservative investors, said Eric Diton, president of The Wealth Alliance. 

“There’s a lot of people out there who are scared … cash is not a bad place to be if you’re that person,” said Diton. “That’s a natural response to rising rates and falling bond prices.”

Cash In Your Chips

Diton pointed to the uncertainty around the artificial intelligence buildout as a reason for clients wanting to hold more cash. AI “is a game-changer, but there are three letters that I don’t think anyone could answer, and those three letters are ‘ROI,’” he said. No one truly knows whether the return on investment will match the capital expenditure of the buildout, and “when there’s uncertainty, people like holding some cash,” Diton said. 

Beyond holding more cash, Diton is making sure that his clients’ investments are not overexposed to the AI trade. “As people found out in 2002, if you make that concentrated bet and you end up being wrong, it could take you, in the case of the Nasdaq, 15 years to just get back to even,” said Diton. “A lot of people don’t have that kind of time.”

Money market funds have been a popular choice. Among the $3.1 trillion that retail investors have funneled into the products: 

• Assets in government money market funds increased last week to $1.98 trillion.
• Tax-exempt fund assets increased to $136.98 billion, while prime money market fund assets decreased to $991.97 billion.

Smoke and Mirrors. Since financial advisors only look at the cash in the brokerage account, they don’t normally see how much money the client has in their regular checking and savings accounts. But now that money markets have a more attractive yield than in decades past, clients may be moving money previously held in cash to a money market funds. “To the advisor, it looks as if the client is holding a larger percentage of their assets in cash, but they haven’t actually changed their cash allocation,” said Gary Zimmerman, founder of the fintech platform Max. “They just moved it from one place to another.”