Investors Cash Holdings at Record High – Good News for Stocks or Bonds?

YEREVAN (CoinChapter.com) – The Federal Reserve’s quantitative tightening policies left the stock market battered and potentially facing recession in 2023. However, experts foresee a change in investor behavior due to the peaking cash holdings. Will the money flow into the risk-on sector or the bonds market?

Notably, the prognosis is not certain, as the potential investors might prefer to hold on to their cash until catching hopeful cues from the Fed. As of the previous FOMC meeting minutes, the policymakers expect interest rate hikes to continue into the current year.

The “mountain of money” climbs higher in 2023

According to the assessments by the Investment Company Institute, the US money market value stood at $4.8 trillion on Jan 4. Over $1.7 trillion lies in retail pockets, while nearly $3.1 trillion is stashed away by institutional investors. The unusually high figure eclipses the previous record of $4.7 trillion in May 2020, in the early months of the Covid-19 pandemic, before the Fed loaded the money printer.

Bank of America technical research strategist Stephen Suttmeier called the sum a “mountain of money,” mentioning that the “higher interest rates have made holding cash more attractive.” However, before assessing the possible implications for the stock market and bonds, it is crucial to see whether the money market can offer holders better terms.

Also read: Bitcoin outperforms Gold in 2023 so far – bullish reversal or dead cat bounce?

Stocks, brokerage accounts, or bonds?

The potential investors don’t ordinarily keep the mentioned “mountain of money” in cash under the mattress, preferring accounts that can yield some returns. Brokerage accounts might be a profitable option in this case. They can generate up to 4% returns, unlike more passive savings accounts.

However, given the turbulent markets, safety is a priority for most investors. Additionally, the high cash holding came to prominence after the investors SOLD their stocks. As a result, the S&P500 (SPX) index slid 20% in 2022, and the 2.5% recovery year-to-date was not convincing.

Cresset Capital’s Jack Abli noted the shift in market behavior, forecasting the cash holding to continue.

Cash is no longer trash. […] In the short-term, it was a very contrarian buy signal. To me, this was people basically selling the market at the end of the year, and they just parked it in the money market funds. If the selling continues, they’ll park more.

said Albin.

Investors don’t trust the stock market just yet.

For the time being, stocks might offer some returns but not safety, as experts have been ringing recession bells since 2022. According to estimations from the World Economic Forum, investors believe there’s a 48% chance for a recession in 2023, which is significantly higher than for the upcoming years.

Bonds might win investors’ attention.

Thus, Albin noted a possible inflow into the bond market, given the lower volatility and uncertainty.

We like the fact that the bond market is finally carrying its own weight after years and years. From that perspective, you would expect a rebalance away from equities into bonds. They’ve essentially been fighting equities with one hand tied behind their back for ten years or more.

said Albin.

The John Hancock investment team agreed with the positive outlook for bonds. The firm asserted that bonds are a more conservative option, which might be an advantage in the turbulent market.

Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.

says the investment team.

Also read: Is Google stock a buying opportunity in 2023?

Charles Schwab bank also expects a rebound and new “opportunities” for the bond market. The latest report noted “attractive yields” ahead for the investors “at lower risk than they have seen for several years.”

It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed-income markets appear poised to rebound.

read the 2023 outlook.

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