Equities benefit when rates fall, and liquidity exits the money market
On a calendar year basis, the S&P 500 performed well during years after the end of a Federal Reserve tightening cycle when money market (“MM”) flows were negative by at least 7%. Considering 2023 saw the greatest % increase in MM assets since ’99, If the current cycle is over, potential MM outflows could support equity performance.
The money market doesn’t appear ready to release its liquidity
Historically, year-over-year change in total MM assets have followed the lead of the Fed Funds Effective Rate. Investors (looking for yield) typically move assets into MM accounts at a slower pace than the Fed changes rates (12-months) and don’t exit until after the Fed begins easing conditions.
With the still increasing growth in MM assets, and because of the lagging relationship highlighted below, it seems premature to expect imminent MM outflows in 2024. Maybe 2025…
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