Throughout this bull market, the phrase “cash on the sidelines” has been frequently used to indicate money sitting in liquid accounts, supposedly waiting to get in the metaphorical game — the stock market.
Rapidly declining inflation in 2024 has spurred speculation that much of the nearly $7 trillion currently held in money market accounts will naturally flow into stocks as the interest rates these accounts pay head downward amid the Federal Reserve's cuts to the target federal funds rate.
However, there’s always a lot of cash in the U.S. economy in different forms. Most of it probably isn’t waiting to see market action. It’s never been in the game and probably never will be.
On Dec. 18, Fed Chairman Jerome Powell threw a little cold water on expectations of many rate cuts in 2025, despite announcing a 25 basis-point cut.
Yet, even if the Fed ends up cutting rates as much and as fast as projected several months ago, there are some good reasons to doubt the widespread assumption that a large chunk of money market cash would flow into stocks in 2025 — or ever, for that matter.
Godot Won’t Show
If Irish playwright Samuel Beckett were alive today and understood these reasons, he’d probably say investors expecting such inflows were waiting for Godot. Similarly, William Shakespeare would probably dismiss this fixation as much ado about nothing, and investment strategies based on it as a comedy of errors.
These conclusions are indicated by contrary historical trends. The assumption of copious so-called sideline cash entering the market has consistently proved faulty in past bull markets.
This time around, expectations for this seem particularly great, amplified by the current scenario of elevated rates, declining inflation and a Fed rate cut in September seen this time to be the first in a relatively tight series.
Yet, huge amounts of cash in the economy are nothing new. The historical reality is that cash tends to transmute not into stock holdings, but into other forms of cash, because many people like it. For them, cash is king. Even many stock investors like to hold a certain amount of it — for spending, emergencies, and just in case they want or need it for something.
Historically, large amounts of cash in money markets, savings accounts, checking accounts and other highly liquid repositories have regularly hit new highs — not just during the low interest rate period of the early 2020s.
And for the past 20 years, figures for cash as a percentage of total assets have been pretty steady, according to data from the Federal Reserve and the Treasury Department.
Cash in the U.S. economy in all forms now amounts to more than $18 trillion. Though this is up nearly 40% from 2019, it’s actually down as a percentage of total household wealth, as stock holdings have grown 50% during this period.
Cash to Cash
Over the last decade, as interest paid on traditional savings accounts has dwindled, more people have opted for the liquidity of checking accounts and literal cash. As renowned economist Kenneth Rogoff notes in his 2017 book, “The Curse of Cash: How Large-Denomination Bills Aid Crime and Tax Evasion and Constrain Monetary Policy,” large bills ($50 and $100 notes) are in relatively short supply because people are hoarding them in home safes as unreported cash income or as gains from illegal activities.
In recent years, the percentage of cash in money market funds has, of course, increased with higher yields at a time when long-term Treasurys posted one of their steepest declines ever.
