A $6 trillion cash hoard could fuel more U.S. stock gains as Fed pivots

$6 trillion of cash on sidelines may boost assets; Fed's dovish pivot may push investors to deploy cash into stocks & bonds.

Investors wondering whether markets can continue their torrid rally are eyeing one important factor that could boost assets: a nearly $6 trillion pile of cash on the sidelines.

Soaring yields have pulled cash into money markets and other short-term instruments, as many investors chose to collect income in the ultra-safe vehicles while they awaited the outcome of the Federal Reserve’s battle against surging inflation. Total money market fund assets hit a record $5.9 trillion on December 6, according to data from the Investment Company Institute.

The Fed’s unexpected dovish pivot on Wednesday may have upended that calculus: If borrowing costs fall in 2024, yields will likely drop alongside them. That could push some investors to deploy cash into stocks and other risky investments, while others rush to lock in yields in longer-term bonds.

Cash has returned an average of 4.5% in the year following the last rate hike of a cycle by the Fed, while U.S. equities have jumped 24.3% and investment grade debt by 13.6%, according to BlackRock data going back to 1995.

"We are getting calls... from clients who have a significant level of cash and are realising they need to do something with it," said Charles Lemonides, portfolio manager of hedge fund ValueWorks LLC. "This is the beginning of a cycle that will start to feed on itself."

Recent market action shows the scramble to recalibrate portfolios may have already kicked off. Benchmark 10-year Treasury yields, which move inversely to bond prices, have fallen around 24 basis points since Wednesday’s Fed meeting to 3.9153%, the lowest since late July.

The S&P 500 is up 1.6% since Wednesday's Fed decision and stands less than 2% below a record high. The index is up nearly 23% this year.