As markets roil, investors hide in cash despite rising inflation

As markets roil, investors hide in cash despite rising inflation

By Lewis Krauskopf

NEW YORK (Reuters) – A rough year for markets is prompting some investors to seek refuge in cash as they capitalize on higher interest rates and await opportunities to buy stocks and bonds at cheaper prices.

The Federal Reserve has unsettled markets in 2022 as it implements massive rate hikes in an effort to moderate the steepest inflation in 40 years. But higher interest rates also translate into better rates for money market funds, which have returned next to nothing since the pandemic began in 2020.

This has made cash a more attractive haven for investors seeking refuge from market gyrations – even though the highest inflation of the past forty years has reduced 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 BofA Global Research survey.

Assets in money market funds have remained elevated since surging after the start of the pandemic, reaching $4.44 trillion last month, not far from a 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 have 10 to 15 percent in cash versus less than 5 percent typically.

“It gives me an opportunity in a few months to look around the financial markets and reassess if the markets and the economy are looking better,” Nolte said.

Investors are looking ahead to next week’s Fed meeting, in which the central bank is expected to enact another big rate hike, after this week’s consumer price index report came in hotter 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 pace for its biggest annual decline 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 on the Crane Index is 2.08%, up from 0.02% at the start 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-cap index.

Of course, staying in cash has its downsides, including the possibility of missing out on a sudden reversal that raises prices for stocks and bonds. Inflation, which stood at 8.3% year-on-year last month, has also reduced the appeal of cash.

“You’re certainly losing some purchasing power with inflation running at 8%+ percent, but … you’re taking some money off the table at a risky time for equity markets,” said Peter Tuz, president of Chase Investment Counsel. “Your shares could drop 8% in two weeks.”

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

Hackett believes stocks may remain volatile in the near term amid various risks, including possible earnings weakness along with high inflation and a hawkish Fed, but is more bullish on the outlook for stocks over the next six months.

“There’s a degree of a coiled spring that develops where if everyone is already on the sidelines at some point, there’s nobody to go on the sidelines and that leads you to potentially any good news resulting in a very big move,” Hackett said. .

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

Stocks are very expensive given risks such as rising interest rates, the possibility of a Fed-induced recession and geopolitical tensions, Kotok said.

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

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Diane Craft)

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