Record Money Market Funds May Point To Bullish Times Ahead

Money market funds allow investors to access risk-free returns close to the current interest rate.

Trillions of dollars could be sitting on the sidelines, waiting for the right opportunity.

The amount of cash parked in global money market funds has hit an all-time high, at $8.3 trillion, $5.7 trillion of which comes from the US.

Investors use money market funds to gain a near-risk-free return close to the actual interest rate. When rates are high, money tends to leave riskier assets such as shares to access these safe returns.

Although these numbers indicate a record amount of money has been pulled from other markets, some analysts believe this is nevertheless bullish for stocks and crypto in the medium-term.

Sitting On The Sidelines

Major markets have rallied strongly in recent weeks. Gold is brushing against its all-time high, and both the S&P 500 and the NASDAQ are just a few percent off their own ATHs. This is despite trillions of dollars of cash being pulled from other assets, to be parked in funds where it can gain 5%+ returns, with very little risk.

This money can be considered to be sitting on the sidelines, but will be deployed if and when investors decide there are better opportunities—in short, when FOMO takes over and prompts them to drop their safe returns for higher but riskier prospects.

The growth in money market funds shows that this has not happened yet. However, neither has it dampened risk markets, as might be expected. At the moment, there is room for both to grow. At some point, though, that dynamic may shift.

Central Bank Cuts

One obvious catalyst for money market funds emptying back into risk assets, including stocks and crypto, is central banks cutting interest rates. As the low-risk returns available to investors diminish, they will naturally look for other opportunities.

As the market cycle progresses, and inflation falls further, we might see this factor come into play.

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