As markets continue a robust rally, attention is drawn to a potential catalyst, nearly $6 trillion in idle cash. Recent surges in yields attracted funds to short-term safe havens while awaiting the Federal Reserve’s strategy against soaring inflation in the US market.

Money market fund assets hit a record $5.9 trillion on Dec. 6, according to Investment Company Institute data.

However, the Fed’s unexpected shift towards a dovish stance might alter this scenario. If borrowing costs drop in 2024, yields will likely decrease, possibly prompting investors to steer cash into riskier assets like stocks or longer-term bonds to lock in higher yields.

BlackRock data dating to 1995 shows that after the Fed’s last rate hike cycle, cash yielded an average of 4.5% in the subsequent year, while US equities surged by 24.3%, and investment grade debt rose by 13.6%.

Recent market movements suggest a portfolio readjustment is underway. 10-year Treasury yields have dropped about 24 basis points since the Fed meeting, hitting 3.9153%, the lowest since July.

Post the Fed’s decision, the S&P 500 climbed 1.6%, nearing a record high, with a nearly 23% gain this year.

However, not all funds in money markets may be readily available for investment. Some are held by institutions that require cash for operational purposes, stated Peter Crane, president of Crane Data.

Moreover, historical trends reveal that a substantial portion of cash remains in money markets despite rate decreases, according to Adam Turnquist, LPL Financial’s chief technical strategist.

Although money market assets are at peak levels, their proportion to the S&P 500 is lower than during previous highs, standing at approximately 15.5%.

Jason Draho, UBS Global Wealth Management’s head of asset allocation, expressed concerns about the rapid market upsurge over the past six weeks, indicating potential limitations on future market gains.