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Money Markets still dominate Retail investors

The resurgence of US stock markets at the end of 2023, marked by a 16% rise in both the S&P 500 and the Dow Jones Industrial Average and the Nasdaq Composite nearing its peak, paints a picture of optimism fueled by expectations that the Federal Reserve's interest rate hikes are coming to a halt. However, this buoyant market scenario isn't enough to lure many retail investors back in. Data from Vanda Research shows a more reserved engagement from retail investors, with net purchases of US equities totaling $11.7 billion in recent trading sessions, notably lower than in previous periods of stock market dips.

This cautious stance among retail investors is understandable, considering the current financial landscape. High-yield savings accounts, certificates of deposit, and particularly money market funds are now offering attractive yields, some exceeding 5%. This is a significant shift, as seen in the Crane Data's report on the average yields of the top 100 money market funds. The appeal of these options, offering decent returns with considerably lower risks compared to the stock market, aligns with the sentiments expressed by retail investors through PersonaFi's data and conversations.

The influx of over $1.1 trillion into US money market funds last year, as reported by the Investment Company Institute, underscores a broader trend: retail investors are increasingly favoring safety and stability in their investment choices. This trend is further evidenced by the substantial growth in assets in the money market fund industry, now at a record high of $5.97 trillion.

Brokerages are feeling the ripple effect of this cautious investor behavior. Companies like Charles Schwab, which saw a decrease in daily average trades despite a growth in new brokerage accounts, are a testament to this shift. The surge in cash parked in Schwab’s money market funds by 70% to $477 billion in the last quarter illustrates a clear preference for safer, cash-like investments.

This cautious approach among retail investors is not just a reaction to the attractive yields in money markets but also a reflection of the broader economic uncertainties. With concerns about a potential recession still lingering and the economy's trajectory remaining unclear, holding onto cash or investing in low-risk money markets seems a prudent strategy. Even with the prospect of interest rate cuts, bringing them down to between 4.5 and 4.75% by the end of 2024, it might not be compelling enough for retail investors to re-enter the more volatile stock market.

In essence, until there's more clarity on the economic front and a confirmed taming of inflation, it's likely that retail investors will continue to find the safety and relatively good returns of money markets more appealing than the uncertain rewards of stock market investments.

By Ken Mooso

Credit: Financial Times, Vanda Research, Crane Data, Investment Company Institute, Charles Schwab, PersonaFi.


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