Jittery Investors Turn to Cash in Hunt for Yield; Inflows to money-market funds are at levels last seen in 2020

The dash for cash on Wall Street is back on.

Investors have added about $135 billion to global money-market funds over the past four weeks, according to EPFR data through Jan. 18. That is the best stretch since the four-week period ended May 2020, when those funds logged roughly $175 billion in net inflows.

A money-market fund is a form of mutual fund that invests in short-term debt securities including Treasury bills and commercial paper. Companies and consumers often use them like checking accounts to store their ready cash.

Increased cash allocations are the latest sign of caution among investors who are questioning whether the recent rebound in stocks and bonds will continue after last year's steep selloff. Many expect markets to remain volatile because Federal Reserve officials have repeatedly said they are committed to fighting inflation with higher interest rates .

The flows are also an indication that investors are hungry for yield. They shunned cash for years when interest rates were low and returns on money-market funds were meager. Holding $100 in cash from the end of 1999 through 2021, for example, meant missing out on a 394% gain had that money been invested in stocks, according to Dow Jones Market Data.

Instead, investors piled into stocks, particularly shares of fast-growing technology companies, in the decade following the 2008 financial crisis. Those stocks powered a bull run that drove major indexes to dozens of record highs.

Then the strategy stopped working. Last year red-hot inflation , higher interest rates and worries about a potential recession rattled everything from stocks to bonds to gold. The S&P 500 declined 19% , while a basket of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities dropped 13%. Suddenly, holding cash looked appealing again.

"Throughout most of the last decade, cash earned you nothing," said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. "In fact, there was a saying: Cash is trash. It's no longer trash. In fact, it's king."

The average return on U.S. money-market funds this month is 4.12%, the highest yield since the 2008 financial crisis, Crane Data show. The S&P 500, on the other hand, has a dividend yield of about 1.6%. The index is up 4.6% so far in January.

By the end of December, assets sitting in money-market funds hit a record $5.18 trillion, Crane Data going back to 2006 show. That surpassed the previous high of $5.16 trillion from May 2020.

Money-market funds received a flood of assets in March 2020 at the onset of the Covid-19 pandemic, and inflows remained elevated for the next two months. Investor interest started building again last fall, and the funds have seen inflows in seven of the past 10 weeks.

Mr. Chang has recommended that clients lower their stockholdings and add to their cash positions to have dry powder ready to deploy for an attractive buying opportunity.

He said it is too early to say whether the stock market has hit its trough. Since 1929, in every recession-induced bear market, stocks have bottomed during the slowdown, except in one instance where they hit their lows after it was over, he said.

Joe Zappia, co-chief investment officer at LVW Advisors in New York, said he has been advising older clients to allocate more of their money to cash. He recommends building a portfolio of Treasury bills of three-, six- and nine-month maturities and reinvesting the money earned to buy similar bonds as each matures.

Yield is "being handed to us in the form of the safest asset in the world," Mr. Zappia said.

In December, individual investors slightly lowered the share of cash in their portfolios to about 21.8%, below the historical average of roughly 22.5%, according to a survey by the American Association of Individual Investors. The reading still marks one of the highest levels since May 2020. In comparison, stock and stock fund allocations are at about 63.9%, above the historical average of around 61.5%.

To be sure, inflation threatens to eat away at the purchasing power of cash, with inflation hovering at 6.5% in December. Excess cash historically has been "worse than a deadweight on portfolios," analysts at UBS said in a recent note. Since 2000, cash in U.S. dollars would have lost around 43% of its real spending power, they said.

Sitting on the sidelines could also mark a missed opportunity to buy discounted stocks. The UBS analysts said the second quarter of 2009, for example, accounted for a significant share of returns for the following decade—and missing that quarter alone would have lowered returns from 532% to 446% based on the S&P 500's performance.

Of course, timing the market is notoriously difficult. Stock valuations have come down sharply, but many strategists have warned that major indexes could see double-digit percentage declines again this year, especially if Fed policy winds up being tougher than investors anticipate.

Maria Vassalou, co-chief investment officer of multiasset solutions at Goldman Sachs Asset Management, said she expects her clients to increase exposure to riskier investments this year, with the Fed's rate-increase cycle nearing an end.

"This year is likely to be a better year than last year," Ms. Vassalou said of risky assets.