Wall St Week Ahead As markets churn, investors hide in cash despite surging inflation

A Wall Street sign is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York, U.S. December 28, 2016. REUTERS/Andrew Kelly

NEW YORK, Sept 16 (Reuters) – A tough year in the markets is prompting some investors to seek refuge in cash as they capitalize on higher interest rates and wait for opportunities to buy stocks and bonds at lower prices.

The Federal Reserve has roiled the markets in 2022 by implementing huge rate hikes in an effort to temper the steepest inflation in 40 years. But the higher rates are also translating into better rates for money market funds, which had returned virtually nothing since the pandemic began in 2020.

That has made cash a more attractive hiding place for investors seeking shelter from market swings, even though the highest inflation in 40 years has dented its appeal.

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

Assets in money market funds have remained elevated since the pandemic began, reaching $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 with interest rates,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages are 10-15% cash. vs. less than 5% typical.

“It gives me an opportunity in a couple of months to look around in the financial markets and redeploy if the markets and the economy look better,” Nolte said.

Investors are eyeing next week’s Fed meeting, where the central bank is expected to enact another huge rate hike, following this week’s consumer price index report that was more interesting than expected. . read more

The S&P 500 fell 4.8% last week and is down 18.7% this year. The ICE BofA US Treasury Index (.MERG0Q0) is on track for its biggest annual decline on record. read more

Meanwhile, taxable money market funds had returned 0.4% year-to-date 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%, up from 0.02% at the beginning of the year and the highest level since July 2019.

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

Of course, sitting on cash has its drawbacks, including the possibility of missing out on a sudden reversal that sends stock and bond prices higher. Inflation, which ran at 8.3% annually last month, has also dented the appeal of cash.

“Certainly you are losing some purchasing power with inflation running over 8 percent, but … you are taking some money off the table at a risky time for equity markets,” said Peter Tuz, president of Chase Investment. Counsel. “Its shares could be down 8% in two weeks.”

While an obvious sign of caution among investors, extreme cash levels are sometimes seen as a contrarian indicator that bodes well for stocks, said Mark Hackett, head of investment research at Nationwide, especially when taken into account. along with other measures of investor pessimism. .

Hackett believes equities may remain volatile in the near term, amid several risks, including possible earnings weakness coupled with high inflation and the hawkish Fed, but is more optimistic about the outlook for equities over the next six months. months.

“There’s a degree of coil spring developing where if everyone is already on the sidelines at some point, there’s no one left to stay on the sidelines and that leads you to any potential good news that results in a very big move,” Hackett said. . .

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

Stocks are too expensive given risks including rising interest rates, the potential for a Federal Reserve-induced recession and geopolitical tensions, Kotok said.

“So I want cash,” Kotok said. “I want cash to be able to redeploy to the stock market at lower or substantially lower prices, and I don’t know what opportunity I’ll have, but the only way I can take advantage of it is by holding that amount of money.”

Information from Lewis Krauskopf; Edited by Ira Iosebashvili and Diane Craft

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