Investors hope Fed Chair Jerome Powell will set the table for rate cuts in September during his Friday speech at Jackson Hole
Even if the Federal Reserve pivots back to rate cuts in September, a wall of cash isn’t likely to flee money-market funds for stocks, a Goldman Sachs strategist says.
U.S. stocks finished mostly unchanged on Monday – near record highs – with investors focused on Federal Reserve Chair Jerome Powell’s coming speech Friday at the central bank’s summer Jackson Hole, Wyo., summit.
Surprisingly resilient second-quarter earnings have been helping drive the stock market to record levels, but hopes for the Fed to resume rate cuts in September also added to the bullish undertone in markets.
The near record pile of cash sitting in U.S. money-market funds also continues to gain attention on Wall Street, with the Investment Company Institute pegging that figure at $7.186 trillion last week.
While households now have an estimated $20 trillion of liquid assets and cash, it also “only represents about 15% of total household financial assets – which is in-line with the long-term average,” said Tony Pasquariello, head of hedge-fund strategy at Goldman Sachs, in a Monday client note.
“I think this suggests there’s not some unusually large wall of money that is soon to be allocated to the stock market (or elsewhere).”
Furthermore, the below chart shows a lack of significant outflows from money-market funds in past cycles when the Fed lowed its policy rate. Money-market assets instead grew over time, even in the wake of ultralow rates following the 2007-’08 global financial crisis.
Investors didn’t flee money-market funds in the past when the Federal Reserve was engaged in rate cuts.
“To be clear, I’m not saying this is bad news for the stock market – I’m just not sure that it’s that predictive of anything,” Pasquariello said.
The blue-chip Dow Jones Industrial Average DJIA closed about 0.1% lower Monday, while the S&P 500 index SPX and Nasdaq Composite COMP both closed virtually flat and the small-cap Russell 2000 index RUT gained 0.4%, according to FactSet. The yield on the 1-month Treasury bill BX:TMUBMUSD01M was up 2 basis points to 4.34%.
While down from last week’s high, traders still had the odds of a Fed rate cut of 25 basis points in September at 83.2% on Monday, according to the CME FedWatch Tool.
