The Great Sit-Out: Why Investors Are Hoarding Cash Amid Market Volatility

April 2025 has begun with a sharp pivot in investor behaviour — one that underscores deepening scepticism about equity valuations and macroeconomic stability. As global markets recoil from President Trump’s aggressive tariff announcements, American investors are increasingly favouring cash over equities. More than $60 billion flowed into money market funds in early April, pushing total assets to a record $7.4 trillion, per Crane Data — the highest since tracking began in 1972.

What’s Behind the Flight to Cash?

In past drawdowns, retail and institutional investors were quick to “buy the dip”, supported by abundant liquidity and ultra-low rates. But this time, the tone has shifted. The S&P 500’s forward P/E remains elevated at 19.5x, well above its 10-year average of 18.6x (FactSet), suggesting that valuations have not corrected meaningfully, despite the broad-based selloff. Meanwhile, Nasdaq has slipped into bear territory, down over 20% from its recent high, and the Dow has entered a correction.

Simultaneously, the relative attractiveness of money market funds, currently yielding an average of 4.2%, is hard to ignore — especially amid fears of an impending stagflationary regime. The Federal Reserve’s previous tightening cycle pulled over $1 trillion into these funds since early 2022, and although the Fed began cutting rates last year, short-term yields remain comfortably above inflation for now.

Behavioural Shift or Strategic Pause?

According to the American Association of Individual Investors, individual investors increased their cash allocations to 18.3% in March, the highest since the early pandemic days. This isn’t just about fear — it’s about optionality. Investors are rethinking whether current conditions justify re-risking their portfolios, especially with geopolitical tensions and inflation risks back on the table.

Crucially, this shift in sentiment is not limited to retail participants. Institutional portfolios, including pension funds and endowments, have also increased liquidity buffers. According to Goldman Sachs Asset Management, institutional cash allocations have risen by 150bps YoY, reflecting broader caution around Q2 earnings volatility and economic uncertainty.

Trump’s Trade War 2.0: Real Risk, Not Rhetoric

Trump’s latest tariffs have already bruised market confidence. The JPMorgan Global Recession Probability Index has jumped to 60%, up from 40% just weeks ago. Investors remember well the 2018-2019 trade wars and their chilling effects on global CapEx and trade volumes.

The difference this time? The global economy is now more fragile. The UK, for instance, is flirting with stagnation, with Q1 GDP growth forecast at just 0.2% QoQ. The eurozone remains sluggish, and China’s rebound has been underwhelming. This limits the ability of global growth to cushion a US-led trade shock.

MY TAKE: What the Smart Money is Doing — and Why It’s Smart

This trend shouldn’t be dismissed as fear-driven hoarding. In my view, it reflects a prudent recalibration of risk in a market where earnings revisions are lagging, multiples remain stretched, and macro headwinds are material.

Personally, I view elevated cash levels as a strategic dry powder reserve, not a vote of no confidence. In private equity, dry powder is often held for precisely these moments — when multiples compress and risk premia widen. The same logic applies to public equity markets: patience is a position.

Moreover, high-yielding cash is a real asset in nominal terms for the first time in over a decade. In effect, investors are being paid to wait. With uncertainty around Fed policy (will inflation force a hawkish pivot?) and political volatility looming, that optionality is worth preserving.

What I’m Watching Next

1. Q1 Earnings – Particularly US Financials: JPMorgan, BlackRock, and Morgan Stanley results will offer vital clues about loan growth, consumer sentiment, and wealth flows.

2. US Core PCE & CPI Data: To assess whether tariffs are stoking inflation again — a key risk to the “soft landing” narrative.

3. Fed Dot Plot & UK BoE Guidance: Will UK and US central banks diverge in H2 2025? That could open FX and rates opportunities.

Conclusion

The rotation into cash may seem defensive, but in reality, it’s reflective of a maturing investor base that recognises the asymmetry of current risks. With macro clouds gathering, capital preservation is the first step in opportunistic allocation. Timing the bottom is a fool’s errand — but being ready when conditions improve is not.

For now, liquidity is king — and cash is no longer trash.