Where did Americans put their money this year? Everywhere.

(Illustration by Alexandra Citrin-Safadi)
(Illustration by Alexandra Citrin-Safadi)

Summary

Where markets stand as 2024 approaches.

This was the year investors could hardly go wrong.

After years of seemingly nowhere to go but the stock market, investors faced a bonanza of choices in 2023.

The Federal Reserve’s aggressive interest-rate hiking campaign paved the way for the most tempting yields on ultrasafe assets in decades. Investors swiftly took advantage, sending torrents of cash to corners of the market that long seemed forgotten.

In the final moments of the year, they are throwing money at virtually everything.

Investors have piled into far-reaching corners of global markets, driving a rally spanning stocks, bonds, gold and even cryptocurrencies. Yields on risky corporate bonds have fallen to some of the lowest levels of the past year, while bond prices have rallied.

And the beleaguered 60-40 portfolio of stocks and bonds is on track to return around 17% this year, a stunning bounceback and its best showing since 2019, according to Dow Jones Market Data.

Here is how investing changed this year—and how people are positioning for 2024.

Rethinking stocks

Americans’ love affair with stocks cooled for much of this year, though sentiment is quickly turning again. There are signs that euphoria is setting in, with recent gains drawing investors back in.

The SPDR S&P 500 ETF Trust, an exchange-traded fund tied to the benchmark index, has drawn around $40 billion of inflows in December, putting it on track for the biggest monthly haul on record going back to 1993.

The S&P 500 has soared 24% this year and is finishing the year with its longest weekly winning streak since 2017.

Investors were more cautious earlier in the year. For 2023, U.S. equity mutual and exchange-traded funds have recorded $133 billion in outflows, the most since 2020, according to LSEG Lipper data as of November.

“If they’re getting 5% to 5.5% in cash, the hurdle for owning stocks is higher," said Ed Clissold, chief U.S. strategist at Ned Davis Research.

Flush with cash

Where did all that money go? Some of it went to cash or cashlike investments.

Assets in money-market funds surged to a record of more than $6 trillion, according to Crane Data. It is a pivot not seen in generations, one with wide-ranging implications for how much risk Americans are taking in markets.

It is easy to see why. Yields on these typically safe funds jumped to some of the highest levels of the past two decades, touching around 5.2%.

What this buildup means for markets is debatable. Some say the pile of cash gives investors ample reserves to put into stocks, which could buoy markets in the new year. Others say it gives Americans extra firepower to spend on everything from concert tickets to flights in coming months.

Much of this hinges on the Federal Reserve’s path in 2024. If bond yields stay high, investors could keep hoarding cash.

“That’s another reason I’m more bullish on the economy," said Laurie Brignac, a chief investment officer at Invesco. “When this money gets put to work, it’s going to have a big impact."

A bond-buying spree

For now, investors are rushing to lock in higher yields.

Purchases of investments such as certificates of deposit and Treasurys have jumped this year to the highest levels since at least 2015, according to Tradeweb data. At Fidelity’s retail brokerage, trades in bonds and CDs jumped around 10-fold since the end of 2021, far surpassing levels recorded over the past two decades, even in times of rising interest rates.

Some investors expect the historic bond rout, which pushed yields sharply higher earlier this year, to end in coming months. Investors haven’t been this bullish on bonds in 15 years, according to Bank of America’s December survey of money managers. Yields fall when bond prices rise.

Taxable bond funds also drew around $147 billion in inflows this year, according to LSEG Lipper data through November.

Earning income—passively

Higher yields on ultrasafe assets brought relief to retirees and everyday Americans alike. Many who had been pushed to take on more risk when interest rates were close to zero felt the brunt of that decision last year, when stocks logged their worst year since the 2008 financial crisis.

This year, some of them have taken chips off the table.

Investors parking cash in money-market funds reaped around $300 billion in interest income—more than in the prior decade combined, according to estimates from Crane Data. That gave many Americans’ wallets a boost in 2023.

In 2024, many investors expect the Federal Reserve to shift to trimming rates after around two years of aggressive hikes. A drop in yields could dent the passive income generated by these safe investments and ripple through the economy in new ways.

Crypto soars again

In one sign of how many investors are still eager to take big risks in markets, crypto prices have soared. Bitcoin prices have more than doubled in 2023.

Write to Gunjan Banerji at gunjan.banerji@wsj.com

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