Putting cash to work in 2024

A wall of money is hanging over U.S. financial markets—in the form of a huge stockpile of liquidity parked in money market funds and other short-term liquid accounts. Where those funds move next, and when, could be a decisive factor in the future performance of both stocks and bonds. 

Our bottom‑line conclusion is that cash seeking higher returns is likely to move into shorter‑term bonds, given attractive yield levels and a potential for price appreciation as yields move lower. However, if expectations of a soft landing for the U.S. economy becomes the market consensus in 2024, cash also could flow into equities, especially the rate‑sensitive sectors that suffered most during the Federal Reserve’s tightening campaign. 

The potential amounts involved are unprecedented in dollar terms, although still below prior peaks as a percentage of U.S. equity market capitalization. As of mid‑December 2023, U.S. money market funds alone held almost USD 6 trillion in assets (Figure 1), up more than 60% since December 2019, on the eve of the pandemic.

In large part, the surge in money market assets is a legacy of the pandemic. Near-zero interest rates and massive bond purchases by the U.S. Federal Reserve, coupled with heavy stimulus payments from the U.S. Treasury, pumped a flood of money into the financial system. Households and businesses saved much of that money and amid the uncertainty, stashed it in liquid products.  

Although the pandemic is in the rear‑view mirror, investors have had several other incentives to remain liquid for the past several years: 

• Surging inflation and rising rates led to one of the worst bond bear markets in history, making longer‑term fixed income assets an unattractive place throughout much of 2022 and into 2023. 
• Equities generally sold off along with fixed income assets during that period, reducing the benefits of diversification within traditional stock/bond portfolios.
• The Fed’s rapid rate hikes lifted yields on money market funds and short‑term accounts from near zero to above 5%, improving the rewards for staying liquid.  

A look at past economic cycles suggests that this strong liquidity preference will ease at some point, especially if the U.S. economy avoids a deep recession and the Fed moves closer to cutting rates. Investor shifts could send a wave of cash into risk assets. 

However, the timing of this move, and the specific asset classes on the receiving end of it, will depend on a number of variables that are hard to forecast, including the direction and pace of future Fed policy moves, lingering inflationary pressures, risks to economic growth, and—not least—investor behavior in the face of uncertainty.  

Investor motives also could matter: Assets parked in money market funds to avoid the 2022–2023 stock and bond sell-offs could return to risk assets, while cash shifted from bank savings accounts appears more likely to remain in money market funds as long as they maintain a yield advantage over savings accounts.

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