Analysis: Cash-Loving Investors Dive In Despite Threat of US Rate Cuts on Payouts

By Suzanne McGee

A favorable period for cash investments may be coming to an end as the Federal Reserve prepares to cut interest rates. Nonetheless, many investors remain committed to their cash holdings.

According to data from the Investment Company Institute, U.S. money market assets reached a record $6.24 trillion in August, even as market expectations rose for a rate reduction during the Fed’s meeting scheduled for September 17-18. Such cuts are anticipated to lower money market yields, which recently stood above 5%—a rate that seemed unthinkable a few years ago. Interestingly, evidence shows that individual investors have not been retreating from cash despite the prospect of lower yields; approximately $100 billion flowed into money markets throughout August, as reported by data analysis firm EPFR.

Retired teacher and baseball coach Vance Arnold, 71, from Fayetteville, Arkansas, currently holds about 80% of his seven-figure portfolio in money markets and other cash equivalents. He stated, “We don’t feel any need to move our money,” and noted that yields have jumped from near-zero levels to between 4.5% and 5.2%, expressing satisfaction with even slightly lower yields.

The resilience of money markets exemplifies how cash has regained status as a competitive asset class alongside stocks and bonds—a notable shift in the investment landscape since the COVID pandemic. Notably, money market assets have increased by $313 billion this year, according to Crane Data, despite substantial stock market gains and expectations of forthcoming Fed rate cuts.

Cash is considered one of the safest and most liquid asset classes, making it particularly appealing for retirees and investors seeking returns while remaining cautious. Although future yield declines are anticipated, they are expected to remain significantly higher than the near-zero rates of past years—an era when well-known hedge fund manager Ray Dalio famously labeled cash as "trash."

Investors are also retaining cash due to concerns over elevated stock valuations, following an 18% rise in the stock market year-to-date that brought indices to record highs, as well as uncertainty surrounding the upcoming U.S. presidential election.

However, there is a risk that investors too heavily focused on cash could miss out on superior returns in other asset classes. Historical data by Hartford Funds reveals that cash has typically returned an average of 2% in the 12 months following a Fed interest rate cut, while stocks have generated returns of 11%, and Treasury bonds have yielded 5%.

Anne Marie Stonich, the chief wealth strategist at Coldstream Wealth Management in Seattle, has been encouraging her clients to shift funds from cash to assets such as government bonds, where they can secure yields by holding to maturity. Yet, she has faced resistance from clients accustomed to the security of cash.

“It’s easy to be complacent, but now it’s time to wake up and pay attention to moving your cash onward,” Stonich advised.

Investor commitment to cash could be challenged if an economic downturn leads the Fed to implement quicker or deeper rate cuts than anticipated. Such a scenario could enhance the appeal of safe-haven assets, particularly if growth concerns trigger a selloff in stocks.

Market participants are closely monitoring U.S. employment data on September 6 for signs of labor market weakness, which previously unsettled markets in late July and early August.

Futures tied to the Fed’s main policy rate indicate that markets are pricing in around two percentage points of cuts over the next year.

Recent inflows into money market funds have also included substantial contributions from institutional investors hoping to lock in yields before the Fed’s anticipated cuts. Individual investors have also played a significant role, contributing over $4 trillion to money market funds, as per data from the Federal Reserve Bank.

Judith Astroff, a 75-year-old systems analyst in New York, holds about 15% of her $500,000 retirement account in money markets. Although much of her portfolio stems from a successful investment in Nvidia, a prominent player in the AI sector, she prefers the stability offered by cash over the volatility of stocks or longer-term government bonds. "I really should take some of that money and put it somewhere that I would have a better chance of seeing some growth," she reflected. However, given her recent success, she feels apprehensive about making further investments.

Brian Nick, head of portfolio strategy at NewEdge Wealth in Stamford, Connecticut, is working to persuade clients to diversify their portfolios, particularly in anticipation of falling yields in the coming months. “You have to demonstrate why some other asset offers a better opportunity,” he noted, underscoring the need to shift perspectives among cash-oriented investors.