Despite the Fed having already cut rates twice since September (and likely cutting them again today), the amount of assets sitting in money market funds keeps piling up. As of last week, money market fund assets amounted to a whopping $6.77 trillion (top panel below). For historical context, this amounts to about 22% of GDP (middle panel below), which is near the top of the range of this ratio for the past 30 years.
The fact that money market assets haven’t peaked yet is not surprising. Looking at prior cycles, the ratio of money market assets to GDP has usually peaked between 11 and 17 months after the Fed began cutting interest rates (bottom panel below). Anecdotally, it seems investors are either willing to accept a slightly lower rate at first, and/or to take some time to realize they are not getting paid as much as they used to, and that they are missing out on stock market gains. Assuming the current cycle follows the historical pattern, money market assets might peak somewhere between August 2025 and February 2026. However, given the incredible performance of the stock market this year, it would not be surprising if FOMO (fear of missing out) kicks in earlier than usual this time around.
Historically, once money market funds peak, they tend to decline fairly quickly, dropping by an average of 3.2% of GDP in the first year and an additional 3% of GDP in the second year. Given the current size of the economy, that would correspond to about $1 trillion each year. For context, $1 trillion is approximately the market capitalization of Berkshire Hathaway, so should that money flow into the stock market, that would be the equivalent of two Berkshire Hathaways worth of demand in the span of two years.
Bottom line: a lot of money is still sitting on the sidelines. Not all of it will enter the stock market, but a meaningful percentage of it will, which should provide a powerful tailwind for the market over the next couple of years.
Source: CWA, Bloomberg, as of 12/17/2024
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
CW Advisors, LLC (“CWA”) (f/k/a Congress Wealth Management LLC) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. For additional information, please visit our website at cwadvisorsgroup.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with CWA’s CRD #310873.
This note is provided for informational purposes only. CWA believes this information to be accurate and reliable but does not warrant it as to completeness or accuracy. This note may include candid statements, opinions and/or forecasts, including those regarding investment strategies and economic and market conditions; however, there is no guarantee that such statements, opinions and/or forecasts will prove to be correct. All such expressions of opinions or forecasts are subject to change without notice. Any projections, targets or estimates are forward looking statements and are based on CWA’s research, analysis, and assumption. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. This note is not a complete analysis of all material facts respecting any issuer, industry or security or of your investment objectives, parameters, needs or financial situation, and therefore is not a sufficient basis alone on which to base an investment decision. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this note. No portion of this note is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Investing entails the risk of loss of principal.
Comments are closed.