The 2023 stock market rally caught many investors off guard, with mountains of excess cash sitting in money market funds. The next question for Wall Street could be whether or not that money will kick prices higher again after an August slump. Money market fund assets have ballooned by more than $925 billion year to date, Bank of America said in a report Friday, citing EPFR Global, as higher interest rates have created juicy yields of 5% or more. Total assets in money market funds are now above $5.5 trillion, according to the Investment Company Institute . But the returns of those products still pale next to what stocks have delivered this year, with the Nasdaq-100, for example, climbing more than 30% year to date. .NDX YTD mountain Growth stocks are up big in 2023, even with August’s market slump. That underperforming cash has become a key point in the bullish arguments of some market strategists, who say the “cash on the sidelines” or “dry powder” can help push the market even higher over the final four months of the year. “Absent a negative fundamental catalyst, long only investors still have dry powder to chase the rally, in our view, as their exposure is not that stretched,” Barclays strategist Emmanuel Cau wrote in an Aug. 8 note to clients. Holding back The argument goes that investors who were too cautious early in the year and parked cash in safe money market funds will grow more confident and look for opportunities to buy minor dips and shift back into stocks. Callie Cox, investment analyst at eToro, said in a note to clients that burgeoning money market fund assets could be a sign that recession fears are still holding investors back. “Money market balances are building up, which is unusual given how much the stock market has rallied recently. Usually, when the coast is clear, people feel better taking their cash and putting it into the market. But even after a fierce 10-month rally, investors clearly don’t trust the stock market,” Cox said. And history suggests that money market funds are not always fuel for a buy-the-dip trend to support a late-stage rally. Todd Sohn, exchange-traded fund strategist at Strategas, highlighted in note this month that total assets in money market funds rose steadily through the late 1990s and into the 2000s as well — even when the tech bubble burst and the stock market began rolling over. Money market assets started to level off in 2002 and then declined in 2003, when the Federal Reserve had cut rates sharply and the S & P 500 was already in a bear market. “Looking historically, we’re reminded that throughout the 1990s equities rose as did money market assets — perhaps a modest comp to a ‘higher for longer’ rate environment. It’s often not until a rate cut and major equity correction that cash actually gets deployed,” Sohn said. Exploding assets Ed Clissold, chief U.S. strategist at Ned Davis Research, said exploding money market fund assets can also exemplify savers who are finding alternatives to traditional bank accounts, rather than shifting allocations within an investment portfolio. “How much of that money is actually earmarked for investment, and if people feel more comfortable in the stock market they’ll put it in the market? Or how much of it is really just rainy day fund money that is being treated better?” Clissold said. Through that lens, the growth of money market funds in 2023 can also be linked to the regional bank crisis earlier this year. Many small and mid-sized banks saw deposit outflows, and their former clients had a wide range of higher yielding products to choose from. The picture is further muddied when considering that money market funds are also used by clients other than retail investors. John Tobin, chief investment officer at Dreyfus (the cash and liquidity management division of BNY Mellon Investment Management), estimated that just under 25% of net flows to money market funds this year have come from institutional players, not retail investors. “This is predominantly operating cash. I’m not saying that corporates don’t have excess cash depending on the cycle, but the money that you typically see in institutional accounts is not a function of an asset allocation play versus equities,” Tobin said. Muddied picture The Dreyfus CIO added that companies have gotten better at predicting their cash flow needs over the past decade, allowing them more flexibility to shift into different money market products, further muddying the picture. “The cash segment that they know they don’t need for six months or longer, you can see them go into prime money market funds and, for holding periods a little longer than that, you’re seeing allocation to areas like ultra short” funds, Tobin said. To be sure, the yield from money market funds is creating real income that clients of all types have not enjoyed for more than a decade, which could get rerouted into equities. Clissold said discussions with wealth advisory clients suggest that “some of that money market fund money does leak into the stock market,” albeit over time. But until the Fed begins to cut rates, it may be hard to convince cautious investors to leave the shelter of money market funds. “The fact that cash is yielding over 5% moves the hurdle rate for risk assets like stocks really high,” Clissold said. Correction: John Tobin is Dreyfus CIO. An earlier version misstated his first name.