Investors are holding over $7.6 trillion funds and they’re not moving it into Wall Street

There’s now over $7.6 trillion just sitting in money market funds, doing absolutely nothing flashy.

That’s the highest on record, according to Crane Data, and most of this cash isn’t under mattresses or stuffed in sock drawers, but sitting in accounts earning around 4.3% thanks to the Federal Reserve’s interest rate hikes.

That yield has been good enough to keep both retail investors and institutions parked right where they are. Now the Fed is ready to cut rates for the first time in a year, possibly by 25 to 50 basis points. This should lower the returns on cash-like investments.

And yet, don’t expect investors to suddenly throw their money into Wall Street. Every time the “wall of cash” theory pops up, it gets dragged out, hyped up, then proven wrong. Again.

Fed prepares rate cut, but the cash stays put

The U.S. job market shows weakness, and inflation still hasn’t cooled off enough. So the Fed’s dual mandate (keep inflation low and employment high) is under pressure.

Shelly Antoniewicz, chief economist at the Investment Company Institute, says the pace of cuts will depend on incoming data, and as yields on cash weaken, some money could start drifting into stocks and bonds. But it won’t be fast.

Antoniewicz also flagged a big shift coming: the SEC might soon allow every mutual fund to launch an ETF share class. That would give investors more flexibility.

So far, 70 fund managers have applied for the go-ahead. And the ICI says hundreds more are lining up if the green light comes. But even with that, it’s not triggering a stampede out of cash.

Peter Crane, head of Crane Data, isn’t convinced any of this means the floodgates are about to open. “The rates matter but much less than most people believe,” he said.

In the 52-year history of money market funds, the only times their balances actually dropped were during the dotcom bust and the 2008 financial crisis. Those were moments when the Fed dropped rates to zero.

Crane says that’s what it takes to drain money out of these funds. “Dream on Wall Street. It makes for a good talking point, but the $7 trillion is not going anywhere but up.”

Institutional investors aren’t shifting anything

This isn’t just retail cash anymore. About 60% of these money market funds now belong to institutions and corporations. That means the bulk of this money isn’t going to jump into Wall Street, no matter how many points the S&P 500 tacks on.

Sure, maybe 10% of the funds could move into riskier assets, but even that’s a guess, as there’s no hard data. And when compared to the $20 trillion Americans keep in regular bank accounts earning almost nothing, money funds still look smart. Even if the Fed cuts rates down to 3%, those funds still offer way more than the 0.5% you get at banks.

“It’s more about how big is the rate differential,” Crane said. A quarter-point cut won’t change much when people remember earning zero just a few years ago. Even if yields fall to 3.8%, Crane said, “is anyone going to care?”

Most balances in money funds aren’t massive. If you’ve got $5,000 sitting there, a 1% swing in yield isn’t worth making a move. “You just spent more money thinking about the problem than you are earning,” Crane said. “Nothing is worth doing for less than 1% or one hundred bucks.”

Even if the Fed cuts rates next week, money funds don’t react instantly. These funds have 30-day weighted maturities, so it takes time for older high-yielding assets to roll off. If there’s a jumbo cut, Crane actually expects a short-term boost in money fund balances since they’ll look better than treasuries, which react faster.

“Over the long term, it is a negative,” Crane said. But short-term? No big move.

Todd Sohn, ETF strategist at Strategas Asset Management, agrees. If money market fund rates drop below 3%, after-tax yield looks weak. “Perhaps you are risk averse and just want to keep it there,” Sohn said.

But for those thinking about shifting, the first move is going out on the curve, buying treasury ETFs with two-to-five-year durations. That gives a shot at price gains and yield, without credit risk.

He also mentioned bond ladder ETFs, which hold treasuries across different maturities to lower volatility.

For those still chasing returns, stocks are always an option, but Sohn warns most portfolios are already overweight big tech. The top eight tech stocks now make up nearly 40% of the U.S. market. Adding more? Probably pointless.

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