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Joseph Kalish, Chief Global Macro Strategist at Ned Davis Research, has cast doubt on the widely held belief that the substantial $6 trillion in money-market funds could be a significant catalyst for a stock market rally. In a client note, Kalish expressed scepticism about the bullish narrative surrounding the “cash on the sidelines” argument, considering historical data spanning four decades.
Kalish referred to a cash influx into the stock market as potentially more of a “propaganda” strategy than a reliable indicator, urging investors to examine the historical record. Ned Davis Research’s team delved into 40 years of money-market fund data, identifying three significant asset declines during this period.
The most substantial drop occurred about twelve years ago after the global financial crisis, witnessing a 35.4% decrease, equivalent to $1.4 trillion. Other notable declines were observed following the burst of the technology stock bubble in the early 2000s (22.2% drop) and during the pandemic in 2020 (10.5% decrease).
Kalish pointed out that all three instances of declining money-market assets coincided with Federal Reserve actions to ease monetary policy and support the economy. In such scenarios, investors shifted funds from cash to higher-yielding assets.
Despite money-market funds accumulating approximately $1.4 trillion over the past year, Kalish emphasised that the historical declines in these assets typically occurred after substantial bear-market movements, which enticed investors back into stocks. This condition is not met, especially considering that money-market funds are yielding 5% or more and equities are hovering near record highs.
The S&P 500 reached an intraday level above its closing record set two years ago. At the same time, the Dow Jones Industrial Average also achieved a series of record closes after significant gains in the fourth quarter.
While acknowledging reasons to be bullish on equities and credit, Kalish cautioned against overestimating the potential impact of the current pile of cash, describing it as a “weak” factor in the overall market dynamics.
