- Retail and institutional investors are holding a record of nearly $5 trillion in cash and cash-equivalents in money market accounts.
- Cash is appealing at a time when bond yields are rising and stocks are pulling back.
- But there are four reasons why investors should put some of their cash to work in stocks, says the top strategist at Riverfront Investment Group.
George Soros, Steve Cohen, and Jim Simons’ funds piled into Tesla and other trendy names last quarter, while Jim Chanos took aim at meme stocks. Here’s a roundup of 5 key trades.
1. Soros Fund Management
2. Point72 Asset Management
3. Renaissance Technologies
4. Bridgewater Associates
5. Chanos & Company
Cash is no longer trash as its appeal grows with yields spiking and this year’s stock rally losing steam, but there are reasons for investors to be careful about shoving the bulk of their funds into that asset class, said one veteran market strategist.
There’s a record $4.8 trillion of cash being held in money market accounts overall, with retail investors alone adding $9.9 billion to their money market funds in the past week to bring the total held in those accounts to $1.79 trillion, according to the Investment Company Institute.
Such capital flows underscore a new undercurrent of unease that has since overshadowed the optimism from the S&P 500‘s nearly 9% rally earlier this year.
Investors are eager to allocate a larger portion of their long-term investment funds to cash and cash equivalents such as money markets, Treasury bills, and certificates of deposit, Doug Sandler, head of global strategy at Riverfront Investment Group, wrote in a note this week cautioning investors to beware the lure of cash.
“Cash feels safe during a crisis, but there is a cost,” he said. “Post-crash, many investors become more cautious even though the likelihood of a subsequent crash is no greater,” said the strategist with more than 30 years in the field.
With the latest market sell-off, the desire to hold cash may increase further. The S&P 500 notched a third weekly loss, stoked by hotter-than-expected inflation readings, including Friday’s PCE index report. Meanwhile, Treasury yields are soaring in anticipation that the Federal Reserve may ratchet up rates by more than expected. The 2-year Treasury yield pushed beyond 4.7% recently, approaching its highest since 2007.
But Sandler laid out four reasons not to stockpile too much cash:
1) Stocks often beat cash
Sandler pointed to work by Wharton professor Jeremy Siegel and research partner Jeremy Schwartz, who found that stocks have outperformed bonds 79.5% of the time and have beaten cash 85.4% of the time over 10-year periods since 1871.
2) Equities are a better match for investors’ desire for growth
Since 1926, US large-cap equities have notched about 6.4% real returns after subtracting inflation, according to Riverfront’s Price Matters valuation framework.
“While actual returns typically vary year-to-year, large-caps have registered positive returns in 94% of the rolling 7-year time periods since that time,” Sandler said.
3) Inflation bites
Cash isn’t safe, as inflation can creep up on you.
“If you are vigilantly watching your bank account to catch inflation, you will miss it,” he said, in part as inflation “hides” by impacting investments about 2.5% annually over the last 30 years.
And inflation is higher in desirable places for retirement or in sectors with more activity such as travel and healthcare.
4) Purchasing-power losses are usually more permanent than stock losses
Between 1926 and 2021, there hasn’t been a period when losses from a diversified basket of US stocks haven’t been fully recovered, Sandler said.
But lost purchasing power usually doesn’t come back. Once prices rise, they don’t retreat, except in rare cases like electronics.
“Consider this, according to the AARP, just over 50 years ago (1972) coffee was $0.66 a pound, a gallon of gasoline cost $0.36, a Ford Mustang would set you back $2,510 and a postage stamp was a mere $0.08,” he said.