Tomorrow marks the summer solstice and the official beginning of summer, when the sun reaches its northernmost point in the sky, above the Tropic of Cancer. In Ashland, Ohio we get to enjoy a total of 15 hours and 7 minutes of daylight, which makes it the longest day of the year.
In market news, stocks increased this week after declining almost 5% last week. On Tuesday, there was positive economic news regarding retail sales, and the S&P 500 was up close to 2%.
On Wednesday, the Wall Street Journal ran an article titled “Investors Flee Market Volatility By Going to Cash.” If you have a subscription, you can read the article online here. It contains the following chart, which shows the total dollars invested in money market mutual funds. Money market funds are typically invested in cash or cash-equivalent investments, making them very conservative and low-yielding.
Here are some interesting observations from the chart:
- Over the past few decades, assets in money funds have steadily increased. Because the value of assets in general has also increased during this time frame, this makes sense. As people become wealthier, some of that money goes into short-term cash investments. At $4.62 trillion, the current level of money market investment is the highest ever. In 2019, investors had $3.54 trillion in these funds, which means over the past year, they have added over $1 trillion.
- During periods of market volatility, assets in money market funds tend to spike. You can see this specifically during the bear market periods from 2000-2002, and 2007-2009. Immediately following these periods, money market funds lost assets as investors began using that cash to buy into riskier investments, with the goal of making higher returns.
- As volatility diminishes, and investors regain confidence in the markets, we would expect some of these money market investments to transferred into stocks and bonds. This could provide a tailwind for stocks to continue to rise.
Handling excess cash can be a delicate process as stock prices continue to increase. On one hand, cash is safe. It’s absolutely necessary to have sufficient amounts on hand. On the other hand, cash is also low-yielding; having too many low-yield investments can be a drag on your long-term returns.