There is a major flaw in the most optimistic stock market thesis

• Money market funds won’t save the stock market from a painful decline, Bank of America says.

• According to the bank, a Fed rate cut of 25 basis points will not change the behavior of savers.

• If cash leaves money market funds, it will not flow to stocks.

The $6 trillion in money market funds will not save the stock market from a painful decline.

A common component of the bullish thesis for stocks over the past year is that trillions of dollars of marooned cash will flood the stock market once the Federal Reserve cuts interest rates, putting downward pressure on the juicy, risk-free 5% yield funds offer. on the money market.

But Bank of America says not so fast, offering two structural reasons why money market funds won’t be the catalyst for a sustained rally that many investors expect.

First, a measly 25 basis point rate cut from the Fed probably won’t change saver behavior because a cash yield closer to 4% would still be much better than rates near 0% offered from 2009 to 2021. .

Not even an interest rate cut of hundreds of basis points would do the trick, according to the bank.

“Historically, MMF (money market fund) AUM growth y/y is usually positive, unless initial rates

According to Cabana, for money market funds to see negative outflows, the Fed would have to cut rates by at least 300 basis points, and that’s not scheduled to happen anytime soon.

“Fed tapering will reduce MMF flows but remain positive unless rates approach zero,” Cabana said.

The December 2025 target for the federal funds rate is just above 3%, according to CME’s FedWatch tool.

The second problem is that even if the Fed were to cut interest rates substantially and trigger a wave of redemptions from money market funds, that cash probably wouldn’t flow into the stock market.

According to Cabana, bonds would instead be the big beneficiary, as money market funds mainly compete with checking accounts that offer near-0% yields rather than stocks.

“If there are FMM outflows, cash will likely move into higher yielding fixed income, not equities.

Eventually, stock bulls should retire the idea that billions of dollars in money market funds will help boost stock prices, analysts said.

“MFM cash should remain marginalized from a risk-taking perspective,” Cabana concluded.

Read the original article on Business Insider