As markets falter, investors pile into cash despite rising inflation

As markets falter, investors pile into cash despite rising inflation

By Lewis Krauskopf

NEW YORK (Reuters) – A tough year in markets is prompting some investors to seek refuge in cash, taking advantage of higher interest rates and waiting for a chance to buy stocks and bonds at cheaper prices.

The Federal Reserve has left markets reeling in 2022 as it implements massive rate hikes in an effort to tame the steepest inflation in 40 years. But higher rates are also translating into better rates on money market funds, which have returned almost nothing since the pandemic began in 2020.

As a result, cash has become a more attractive hedge for investors seeking shelter from market vagaries – even though the highest inflation in forty years has dulled 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 from BofA Global Research showed.

Assets in money market funds have remained elevated since jumping after the pandemic began, coming in at $4.44 trillion as of last month, not far from its peak of $4.67 trillion in May 2020, according to Refinitiv Lipper.

“Cash is becoming a viable asset class now because of what has happened to interest rates,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages are 10 to 15% in cash by comparison. with usually less than 5%.

“It gives me the opportunity in a few months to look around the financial markets and re-deploy if the markets and the economy look better,” Nolte said.

Investors are eyeing next week’s Fed meeting, at which the central bank is expected to enact another jumbo rate hike, after this week’s consumer price index report came in warmer than expected.

The S&P 500 fell 4.8% in the past 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 Fund Money index, an average of the 100 largest such funds.

The average yield in the Crane index is 2.08%, up from 0.02% at the start of the year and the highest level since July 2019.

“They are looking better and their competition is looking worse,” said Peter Crane, president of Crane Data, which publishes the money fund index.

Of course, sitting in cash has its downsides, including the possibility of missing a sudden reversal that takes the prices of stocks and bonds higher. Inflation, which stood at 8.3% on an annual basis last month, also added to the appeal for cash.

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

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

Hackett believes that stocks could remain volatile in the short term, amid various risks including possible earnings weakness as well as high inflation and the hawkish Fed, but he is more bullish about the outlook for equities over the next six months.

“There’s a certain amount of odd spring going on and if everybody’s already on the fence at some point there’s nobody left to go on the fence and because of that you might have some good news coming out of it a really 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% cash after being almost entirely invested in equity markets last year.

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

“So I want cash,” said Kotok. “I would like to be able to deploy the money back into the stock market at lower prices or much lower prices, and I don’t know what opportunity I will have but it is the only way I can tap it and keep that much of it. money.”

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

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