Executive Summary 

• The rise in yields in money market funds over the past two years, driven by the Fed's rate hikes, has attracted inflows and bolstered household interest income.
• Lower longer-term returns on cash should make prospective returns on other assets incrementally more attractive on a relative basis.
• These shifts in prospective returns should alter investor’s preference and are likely to prompt a shift from money market funds to other assets.
• Given the steep cost of staying out of the market, investors should increasingly shift unneeded cash toward other investment options as cash rates decline.

Data shown in the left panel are total money market fund assets through time in trillions of U.S. dollars. Data shown in the right panel represent estimated inflation adjusted monthly income from money market funds in billions of U.S. dollars. Monthly money market fund income is derived by multiplying the yield on Vanguard’s Federal Money Market Fund by the total amount of U.S. money market fund assets. Past performance may not be indicative of future results.

• The rise in yields in money market funds over the past two years, driven by the Fed's rate hikes, has attracted significant inflows into money market assets.
• Income from money market funds has reached new highs, providing households with sizable interest earnings.
  

Longer term, cash is projected to have more moderate returns expectations

Data shown are Glenmede's proprietary estimates for 10 year expected returns for several asset classes. Proxy indexes for each asset class are as follows: Cash (Bloomberg Treasury Bellwethers 3M), Core Fixed Income (Bloomberg U.S. Aggregate Index), Corp High Yield (Bloomberg U.S. Aggregate Credit Corporate High Yield BB Index), U.S. Large (MSCI USA Index), Int'l Developed (MSCI EAFE Index), U.S. Small (Russell 2000 Index), Int’l Emerging (MSCI EM Index), Real Estate (FDSAGG World / Real Estate Index), Absolute Return (HFRI Fund of Funds Composite), Natural Resources (Bloomberg Commodity Index). Expected returns for private equity are derived by applying a liquidity premium on top of expected returns for U.S. Small. Recent cash return is the 12-month expected return one year ago (8/7/2023). These figures are projections which, though arrived at in good faith, are not guaranteed. Actual returns may differ materially from projections. One cannot invest directly in an index.

• The Federal Reserve is now expected to begin cutting rates in September, which should lead to lower future returns on cash.
• Lower longer-term returns on cash should make prospective returns on other assets incrementally more attractive on a relative basis.

There is a price of staying out of the market 

Data shown is the historical annualized total return for the S&P 500 which is a market capitalization weighted index of large cap stocks over the span of twenty years. The data points reflect the annualized return if an investor were to miss the best ten, twenty and forty days over the period specified. Past performance may not be indicative of future results. One cannot invest directly in an index.

• Lower prospective returns on cash increases the already steep cost of staying out of the market; on average, missing the best 1 – 2 days per year has resulted in worse returns than cash.
• Investors should increasingly shift unneeded cash toward other investment options as cash rates decline.