Investors have been increasing allocations to cash in money market funds for almost 2 years, so AUMs have reached $6T. The absolute number is mind boggling. However, when considered in relative terms vs the market cap of the U.S. equity market, it is currently around 12% of it, which is around the historical mean for the ratio. Where do we go from here? Cash allocations can increase substantially (basically double to $12Tn) and still be within the historical norm. That increase wil be small compared to the total equity market cap, but it would be very relevant in terms of outflows from the market, as it happened during 2022. If we believe in mean reversion, cash allocations should continue to rise, negatively affecting the market. And If rates continue to be higher for longer, investors have an incentive to continue in money market funds.
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Chart source: Morgan Stanley
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