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The Nasdaq Composite (^IXIC) notched its third straight win on Wednesday.
And while investors were laser-focused on the enthusiastic reaction to Nvidia (NVDA) earnings late Wednesday, a much broader trend has established itself this year with important ramifications for investors — cash is king again.
For the first time in 22 years, cash — defined as the interest rate paid out by the US government on 3-month Treasury bills — is offering investors a higher return than the earnings yield on the S&P 500. The earnings yield measures the profits of all members in the index divided by the value of the index.
Last year, the Federal Reserve reacted to surging inflation with aggressive rate hikes and stocks got hammered.
With a dwindling denominator, the earnings yield of the S&P 500 surged, topping out at 5.8% in mid-October, right around the same time bear market lows in the index were established near 3,500.
But with the S&P 500 up more than 20% from these lows and corporate earnings on the decline, the earnings yield of the index has dwindled to around 4.7%.
At the same time, the Fed has continued raising rates, driving up yields across the Treasury curve.
And while plenty of attention has been paid to recession warnings sent by the inverted yield curve, three-month bills now yielding close to 5.5% has also made this cash-like holding competitive with the stock market for the first time in a generation.
And market implications are already being felt in a big way.
This year alone, juicy yields over 5% offered by money market funds have attracted record inflows of $925 billion. And it is telling that this year-to-date total in August already bests the prior record of $917 billion in 2020 — a year when investors were obsessed with safety.
And while the $20 bill in your pocket won't pay you any more than a brick of gold in a vault, electronic dollars deposited in money market funds, savings accounts, and in short-term government securities are yielding the most in decades.
All of which is changing the investment calculus for a generation of investors who have known nothing except ultra-low interest rates.
After a generation of investors being told "There is No Alternative (TINA)" to the stock market with bonds offering next to nothing, investors are stumbling into higher-paying assets without long-term obligations.
And as we witnessed with the regional bank panic earlier this year, money now flows at the speed of social media.
Combine that with the fact that investors are facing a generational change in investing dynamics and we've likely only begun to feel the effects of a new investing paradigm.
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