What factors have contributed to the appeal of money market funds for investors in recent years?
A staggering $6.5 trillion is currently sitting in money market funds – a 60% leap since December 2019. This surge was fueled by government stimulus during the COVID-19 pandemic, which injected cash into the economy and contributed to the expansion of this liquid segment of the market. This significant stockpile of cash is closely monitored by investors and creditors, as it represents a large reserve of liquidity in the financial system.
Money market funds have seen a surge in popularity over the past few years for a few reasons. This has mainly been driven by elevated short-term rates, the highly liquid nature of these vehicles, and the flexibility to redeploy as attractive opportunities emerge. Notably, the Federal Reserve’s aggressive rate hiking cycle that aimed to combat sticky inflation pushed money market rates over 5%, making these funds far more attractive to investors seeking higher yields with minimal risk. One of the appealing aspects of this cash management vehicle is its high liquidity, allowing investors to access their capital quickly while maintaining a relatively safe and stable investment. This strategic positioning allows for opportunistic deployment of capital during market pullbacks. As a result, money markets have offered an ideal balance between liquidity and potential for higher returns compared to traditional cash. However, continuing into 2025, there have been rate cuts that have begun to filter through the economy and as a result, the attractiveness of money markets has slowly diminished. The evolving environment presents compelling reasons to consider deploying money market fund assets into the broader market this year.
Federal Reserve Rate Cutting Cycle
The Federal Reserve began its most recent rate-hiking cycle in March 2022, which continued until July 2023, positioning the federal funds rate at 5.25-5.50%. Once they stopped hiking rates, there was a period of 14 months until the first Fed rate cut last September (50 basis points). Following that, there were subsequent rate cuts which occurred last November (25 basis points) and last December (25 basis points). As a result, the current range is 4.25-4.50%.
Kicking off the new year, it is important to monitor anticipated rate cuts expected in the upcoming months, especially as it relates to money market investments. As these cuts take effect and filter through the economy, short-term interest rates – critical to money market investors – are likely to decline. This shift makes money market investments less appealing compared to prior months, where rates peaked at 5.25-5.50%. Money markets generate their income by investing in short-term instruments (treasury bills, commercial paper, repurchase agreements) that pay regular interest, which then the fund collects and passes onto investors as income. Consequentially, as these short-term investment rates decline, the income component becomes less attractive to investors searching for a steady, fixed income stream. Although these funds have gained popularity in the past and have been seen as a “safe haven” for investors to hold cash, the changing landscape highlights the importance of reevaluating investment strategies in light of shifting dynamics.
Election Year Volatility & Historical Performance
Looking back at the 2024 election, it’s important to recognize the historical trends that follow such events. While typical election years often bring volatility due to the finalization of presidential candidates and establishment of their main policy platforms, 2024 stood out with significant market strength. This resilience was supported not only by economic strength and easing monetary policy, but also by the familiarity of the original primary candidates – having previously ran against each other – and by Harris’s established policy positions as the sitting Vice President, which provided a layer of protection against the usual election-year volatility.
Historically, markets tend to gain positive momentum post-election, driven by a clear understanding of future policies and government composition, instilling a sense of certainty – something markets generally favor! Transitioning into the new year, this post-election environment presents compelling opportunities for investors to put their money market funds to work in the broader market and capitalize on this historical upward trajectory.
Geopolitical Risk
Major global conflicts can understandably lead investors to gravitate towards more conversative investments, such as money market funds, especially relative to the current ongoing conflicts in the Middle East and Ukraine that have continued into 2025. As these events occur and new information is released, it introduces significant headline risk – when sudden news events can rapidly affect stock prices – and often leads to heightened short-term market volatility. However, for disciplined, long-term investors, these periods of uncertainty can present interesting opportunities. Looking past short-term market movements, investors can position themselves to benefit from eventual market recoveries and segments of the market that tend to benefit from these types of conflict.
Historical data shows the importance of the long-term investing approach and maintaining a diversified portfolio. Over the last 50 years, numerous geopolitical events have triggered the market to sell off for an extended period of time. According to J.P. Morgan, the average recovery time from when the sell off occurs to when the market fully recovers is 13 days*. These market sell offs can provide opportunities for investors to deploy their money market assets and take advantage of buying securities at discounted prices. Additionally, the average time period mentioned above highlights the importance of keeping portfolio time horizons in mind, as they can range from 5, 10, or even 20 years. Staying focused on longer-term goals helps to mitigate short-term headline risks and participate in eventual recoveries.
Certain sectors of the market are particularly well-positioned to benefit from global conflicts, such as energy and defense. For instance, disruptions in oil-producing regions, especially the Middle East and Russia, present risks to supply chains and oil production, which can drive energy prices up, benefiting oil and gas companies. Similarly, defense companies tend to see increased demand for military equipment, technology, and support services as governments prioritize defense spending, benefiting companies well positioned to capitalize on elevated security needs. Emphasis on a well-diversified portfolio and forward-looking investment strategies not only helps manage downside risk and unlock upside potential from different segments of the market but also encourages investors to put their money market assets to work and stay fully invested.
Conclusion
Progressing through 2025, investors face a shifting landscape shared by monetary policy changes, post-election dynamics, and geopolitical tensions. While money market funds have provided attractive returns for minimal risk, the anticipated decline in short-term rates and evolving market conditions suggest diminishing returns for these investments. This reiterates the importance of reevaluating strategies and considering deployment of cash reserves into the broader market. By maintaining a diversified portfolio and staying focused on specific portfolio goals, investors can navigate volatility, capitalize on market recoveries, and unlock growth potential this year.
*Source: Standard & Poor’s, Deutsche Bank, FactSet, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets – U.S. Data as of April 16, 2024.
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