US Investors Hoarding Cash Despite Looming Rate Cuts: A Deep Dive

US Investors Hoarding Cash Amid Expectations of Rate Cuts

American investors are holding onto massive amounts of cash, even as interest rates begin to decline. Data suggests that the vast majority are unwilling to shift these funds into riskier investments. According to industry research firm Crane Data, money market fund assets reached a record $7.7 trillion last week. These funds saw inflows exceeding $60 billion in the first four days of this month.

Money Market Funds Attract Investors

The latest wave of inflows into money market funds began in 2022 when the US Federal Reserve initiated a cycle of interest rate hikes. As a result, the yields on these funds, which primarily invest in short-term government bonds, rose, providing investors with high cash returns not seen in years. Despite the significant rise in the stock market and its reach to record levels, many investors still prefer to allocate a significant portion of their investment portfolios to these "near-cash" assets.

Preference for Cash Amid Rate Cuts

Even with the Federal Reserve beginning to cut interest rates, this situation is unlikely to change quickly. Current money market fund yields remain significantly higher than levels seen from 2010 to the early 2020s when interest rates were pushed to extremely low levels due to the financial crisis and the COVID-19 pandemic. Looking at some indicators, current US stock valuations appear historically high. Some investors prefer to wait for prices to fall, and a single rate cut (or even two or three) will not change their minds. "This is really a wall of cash because the money isn't going anywhere else," says Peter Crane, president of Crane Data. Data from a survey conducted by the American Association of Individual Investors (AAII) shows that the percentage of cash held by individual investors remains higher than levels seen a few months before the Federal Reserve began raising interest rates in 2022.

Money Market Fund Returns Outperform Bank Savings Accounts

The Crane Data's 100-fund money market index shows that the seven-day net annualized yield for money market funds was 4.1% as of the end of August. In contrast, according to a survey conducted by Bankrate, the average annual percentage yield (APY) on US bank savings accounts is only 0.6%. "Lower interest rates won't force me to buy stocks," says Tom Ward, a 64-year-old executive recruiter in Michigan. "I have no problem waiting with cash." Ward has allocated about 40% of his investment portfolio to money market funds and plans to keep most of these funds there, even if it means he may miss out on potentially higher gains in the stock market.

Diverging Views on Holding Cash

Brian Jacobs, portfolio manager at Aptus Capital Advisors, points out that while investors may be moving more money into money market funds, the total amount of cash they are holding remains relatively stable. In fact, data shows that investors are consistently increasing their allocation to stocks, and the significant rise in stock prices since 2023 has not deterred them. "When a society's wealth increases, it is natural for people to hold more cash. People hold cash as a 'buffer,' not because its return is higher than other assets," says Jacobs.

Divergent Views Between Institutions and Investors on Cash

Despite this, some institutions on Wall Street are trying to convince investors not to hold such a high percentage of "cash reserves." The strategy team at French bank Societe Generale recently lowered the recommended percentage for holding cash from 10% to 5% and advised investors to increase their holdings of stocks. Crane predicts that the size of cash in money market funds will continue to grow by the end of the year, and he would not be surprised if total fund assets exceed $8 trillion in 2026. He points out that November and December are usually the "peak season" for money market funds, and companies and governments may also temporarily deposit funds in money market funds because the returns on these funds do not change as quickly as US Treasury bonds in response to Federal Reserve policies. Some investors are willing to let their money "sleep" until the market sees more significant drops. Matt Bonny, a 32-year-old actuary, says he is unsure whether replacing cash with stocks is the right choice before that happens. For years, Bonny has invested almost all of his savings in the stock market, but he has recently begun to move more money into money market funds. This type of asset currently accounts for about one-fifth of his retirement savings. "If the market drops to a more reasonable level, holding a certain percentage of cash will be very helpful. It is difficult to determine whether investing money at current prices will achieve the rate of return I expect," he adds. Beyond this, investors can explore alternative investment instruments such as government bonds and high-credit-rated corporate bonds, which may offer higher returns than money market funds with a similar level of risk. They can also look for opportunities in emerging stock markets, which may offer higher growth potential in the long term but also involve greater risks. It is important for investors to remember that diversification is key to minimizing risk and maximizing the chances of achieving their financial goals. They should consult a qualified financial advisor before making any investment decisions. Further considerations for investors include evaluating their personal risk tolerance, investment timeline, and overall financial goals. Understanding these factors can help them determine the appropriate allocation between cash and other asset classes. Keeping informed about macroeconomic trends and market conditions is also crucial for making well-informed investment decisions.