CHART OF THE DAY: 5% yields set to drive record $1.4 trillion to money market funds in 2023

If yields drop, then bonds and stocks should start to look more attractive to investors that are looking for a place to park their cash.

• Investors are on track to pour a record $1.4 trillion into money market funds this year.
• The surge in assets comes amid a spike in interest rates, with cash yielding around 5%.
• The 2023 surge in money market fund assets eclipses the 2020 inflow surge sparked by investor panic.

Our Chart of the Day is from Bank of America, which shows that investors are on track to pour a record $1.4 trillion into money market funds this year.

The surge eclipses the more than $1 trillion of inflows seen in 2020, and is several times larger than the annual inflows seen during the low interest rate environment during the 2010s.

The investor whiplash seen in money market fund flows since 2020 is being driven by two factors: panic and juicy yields. In the case of 2020, investors poured their money into risk-free money market funds because of panic and fear related to the onset of the COVID-19 pandemic.

But that fear quickly subsided towards the end of 2020 and throughout 2021, as the stock market quickly reversed its initial losses and surged to record highs on the back of massive fiscal and monetary stimulus measures.

Fast forward to 2023, and investors are pouring into money market funds not out of panic, but because of high interest rates. Even as the stock market delivers impressive year-to-date gains of more than 15%, investors are still attracted to the risk-free 5% interest rate offered by most money market funds.

"Cash still attracting biggest inflows," Bank of America investment strategist Michael Hartnett said in a Friday note.

What could reverse those money market inflows? Most likely a drop in interest rates. If yields drop, then bonds and stocks should start to look more attractive to investors looking for a place to park their cash.

That is one factor that is driving the bullish 2024 stock market outlook for Fundstrat's Tom Lee, who said in a Friday note that "investors allocate out of cash into equities" is one of the potential incremental drivers for stock prices next year.

And retail investors aren't the only ones pouring money into money market funds. Institutions have built their money market fund assets to $3.5 trillion, bringing the total assets of money market funds to a record $5.7 trillion.

That pile of cash could serve as some serious fuel for stock prices if interest rates fall.