FILE PHOTO: A jogger runs past the Federal Reserve building in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo
A golden era for cash may be winding down as the US Federal Reserve (Fed) gets ready to cut interest rates.
Many fans of the investment class are staying put anyway.
Assets in US money markets hit a record US$6.24 trillion last month, data from the Investment Company Institute showed on Aug 21, even as markets became increasingly confident that the Fed was gearing up to lower rates at its Sept 17-18 meeting.
Those reductions are expected to eventually pull yields in money markets down from above 5%, a rate unimaginable a few years ago.
So far, however, there is little evidence that individual investors are abandoning cash to chase returns in stocks and bonds.
Some US$100bil flowed into money markets in August, according to data analysis firm EPFR.
“We don’t feel any need to move our money,” said Vance Arnold, a 71-year-old retired teacher and baseball coach from Fayetteville, Arkansas, who has about 80% of his seven-figure portfolio in money markets and other cash equivalents.
Money-market yields went from near-zero to “4.5%, 4.7%, and now we’re over 5.2%. I can live with 4.5% again”, he said.
The durability of money markets is a recent example of how cash has re-emerged as an asset class that can compete with stocks and bonds, one of the most striking shifts in the post-Covid investment landscape.
Assets in money markets have grown by US$313bil this year, according to Crane Data, which tracks money market funds, despite heady returns in stocks and expectations that the Fed will cut rates.
Cash is seen as one of the safest and most liquid asset classes, boosting its appeal to retirees and investors looking to get paid while staying on the sidelines.
Though yields are expected to fall in coming months, projections show them stopping well short of the near-zero levels of a few years ago, when hedge fund legend Ray Dalio famously declared cash “trash”.
Clients are also hanging onto cash because of worries about rich stock valuations following an 18% year-to-date rally that has taken the S&P 500 to record highs, as well as uncertainty ahead of the US presidential election, wealth advisers said.
But investors holding too much cash could miss out on the often superior returns of other asset classes.
Cash has returned an average of 2% in the 12 months after the Fed starts cutting interest rates, while stocks have returned 11% and Treasury bonds gained 5%, according to a study by Hartford Funds of rate-cutting cycles since 1928.
Anne Marie Stonich, chief wealth strategist at Coldstream Wealth Management in Seattle, has been urging clients to move out of cash and into assets such as government bonds, where they can lock in yields if they hold the securities to term.
Her efforts have met resistance from cash-loving investors, she said.
“It’s easy to have been complacent, but now it’s time to wake up and pay attention to moving your cash onward,” Stonich said.
Investors’ dedication to cash could be tested if a weakening economy prompts the Fed to cut rates faster or deeper than expected.
Such a scenario could conversely raise the appeal of haven assets if growth worries prompt a stock sell-off.
Traders will be watching US employment data on Sept 6 to see if the labour-market weakness that roiled markets in late July and early August has dissipated.
Futures tied to the Fed’s main policy rate show markets pricing about two percentage points in rate cuts over the next year. — Reuters
Suzanne McGee writes for Reuters. The views expressed here are the writer’s own.
