As US markets turn, investors hide in cash despite soaring inflation

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A tough year in the markets has some investors fleeing to cash as they take advantage of higher interest rates and wait for opportunities to buy stocks and bonds at lower prices.

The Federal Reserve shook the markets in 2022 by implementing huge rate hikes in an effort to moderate the highest inflation in 40 years. But higher rates also mean better rates for money market funds, which had yielded next to nothing since the pandemic began in 2020.

This has made cash a more attractive hiding place for investors seeking shelter from market fluctuations – even as the highest inflation in forty years has shaken its appeal.

Fund managers increased their average cash balances to 6.1% in September, the highest level in more than two decades, according to a widely watched survey by BofA Global Research.

Money market fund assets have remained high since the post-pandemic jump, hitting $4.44 trillion last month, not far from their peak of $4.67 trillion in May 2020, according to Refinitiv Lipper .

“Cash is now becoming a viable asset class because of what’s happened to interest rates,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages hold 10-15% cash against less than 5% generally.

“It gives me the opportunity in a few months to look at the financial markets and redeploy if the markets and the economy improve,” Nolte said.

Investors are eyeing next week’s Fed meeting, where the central bank is expected to adopt another giant rate hike, following this week’s Consumer Price Index report, more warmer than expected.

The S&P 500 fell 4.8% last week and is down 18.7% this year. The ICE BofA US Treasury Index is on course for its biggest annual drop on record.

Meanwhile, taxable money market funds had returned 0.4% so far this year as of the end of August, according to the Crane 100 Money Fund Index, an average of the 100 largest such funds. .

The average return of the Crane index is 2.08%, compared to 0.02% at the start of the year and its highest level since July 2019.

“They look better and their competitors are worse,” said Peter Crane, president of Crane Data, which publishes the money market fund index.

Of course, sitting in cash has its downsides, including the possibility of missing a sudden reversal that drives stock and bond prices higher. Inflation, which stood at 8.3% year on year last month, also undermined the attractiveness of cash.

“Granted, you’re losing purchasing power with inflation over 8%, but … you’re taking money out at a risky time for the stock markets,” said Peter Tuz, president of Chase Investment Counsel. “Your shares could be down 8% in two weeks.”

While a clear sign of caution among investors, extreme levels of cash are sometimes seen as a so-called contrarian indicator that bodes well for stocks, said Mark Hackett, head of investment research at Nationwide, especially when taken in concert with other measures of investor pessimism. .

Hackett thinks equities could remain volatile in the near term amid various risks including potential earnings weakness, high inflation and a hawkish Fed, but he’s more optimistic about the outlook for equities over the next six months.

“There’s a degree of coil spring that develops where if everyone’s already on the sidelines at some point, there’s no one left to stay on the sidelines and that potentially leads you to any good news resulting in a very outsized movement,” Hackett said. .

David Kotok, chief investment officer at Cumberland Advisors, said his US equity portfolio of exchange-traded funds is currently 48% in cash after being almost entirely invested in stock markets last year.

Stocks are overpriced given the risks, including rising interest rates, the potential for a Fed-induced recession and geopolitical tensions, Kotok said.

“So I want money,” Kotok said. “I want the money to be able to flow back into the stock market at lower or significantly lower prices, and I don’t know what opportunity I’ll have, but the only way to take it is to hold that amount of cash.”

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

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