Tuesday’s market rout shows that cash is back.
After years of favoring stocks in general and the fastest-growing, riskiest shares in particular, many investors are embracing asset classes that promise to hold their value through a period of volatility that analysts expect to persist into next year and beyond.
On Tuesday the Dow industrials (.DJI) tumbled 799.36 points, or 3.1%, the latest stage of a twisting autumn retreat from riskier investments. The yield on the 10-year U.S. Treasury note tumbled to its lowest level in three months, reflecting rising prices as purchasers sought the safety of government bonds.
Traders said the latest stock pullback reflected a sense that trade tension would continue to shadow markets in coming months, at a time when tightening Federal Reserve policy and softening economic indicators are getting more attention.
Those concerns and the impact of higher interest rates are making it easier to justify putting some funds on the sidelines, investors said. That marks a sharp contrast from much of the postcrisis era, in which cash in the bank or in other low-risk destinations generated next to no return.
U.S. cash and cash equivalents are on track to be some of the best-performing assets in 2018, enticing money managers struggling with a rare synchronized downturn in stocks, commodities and bond markets. Rising returns on cash make it more appealing for investors to move out of other investments, risking a turning point for markets as the global economy shows signs of slowing and the Federal Reserve slowly normalizes interest rates.
“For the first time in a long time, cash is interesting again,” said Hani Redha, a multiasset portfolio manager at PineBridge Investments, which is now considering allocations to cash.
One popular cash proxy—the S&P U.S. Treasury Bill 3-6 Month Index, which measures the performance of U.S. Treasury bills maturing within three to six months—has returned 1.7% so far this year. That comes against a background of lower and even negative returns on most assets this year, including global stocks, high-yield and investment-grade corporate bonds, long-term government debt and a range of commodities.
There appears to be room to add more to cash positions: Fund managers’ cash levels stood at 4.7% in November—slightly above the average of the past 10 years, but below the 5.1% levels reached in September and October, according to Bank of America Merrill Lynch.
For most of the past decade, holding cash or cash-like instruments such as certificates of deposit or short-dated Treasury bills has failed to pay off. A person who invested $100 in the S&P 500 (.SPX) about 10 years ago would have about $396 by now, compared with roughly $104.50 on the same investment in cash.
This year has been different: The MSCI ACWI of global stocks is down 5.1% since the start of 2018 and the S&P 500 in November dipped into negative territory for the year, and was trailing cash for most of the fall until a recent bounce. The Bloomberg Barclays Global Aggregate Index of government and corporate bonds is down about 3% on the year.
The return of cash as a viable alternative signals a major change in investor sentiment and poses a risk to the nearly 10-year bull market in stocks.
For years, a key pillar of the bull market in stocks was the TINA effect, wherein “there is no alternative” to stocks. Equities, even if expensive, were seen as the right way to go since other asset classes offered worse returns.
But after nearly a year of weak returns and roller-coaster markets, that paradigm appears to be shifting.
“TINA has disappeared, and now you have TIRA: there is a real alternative,” said Fabrizio Quirighetti, head of multiasset at SYZ Asset Management. He has moved allocations of cash-like instruments up to 10% of conservative portfolio strategies, up from nearly 0% two months ago.
“It’s acting a little bit like a magnet: draining some liquidity out of risky assets that are not yielding enough or not rewarding enough going forward,” he said.
If cash manages to outperform stocks and bonds this year, that would mark the first time since 1992, according to analysts at Bank of America Merrill Lynch.
Even gold, which has traditionally benefited in times of market stress and has been used to protect portfolios when stocks are declining, has fallen nearly 5% this year, while cryptocurrency bitcoin has dropped about 80% from its peak.
Only a handful of investments have done better than U.S. cash so far this year, including Israeli and Brazilian equities, and cocoa.
The moves come amid a series of headwinds for stocks and other risky assets: recent readings on global growth have slowed down, global trade is in flux and U.S. corporate earnings growth is forecast to slow in 2019 to around 9% after rising 22% in 2018, according to FactSet estimates.
The Federal Reserve, meanwhile, has continued to signal another interest-rate increase in December—the fourth U.S. rate rise this year—and more in 2019, putting pressure on stocks and bonds.
“You have the slowing of earnings, the slowing of economic growth—the only thing that’s not slowing is the Fed’s appetite to raise rates,” said Mike Thompson, who runs $37 billion in assets under advisory at S&P Investment Advisory Services. Choosing assets this year has gone “from picking the best story” to picking the least bad, he said.
Cash typically benefits from rising interest rates as its returns climb in tandem with the fed-funds rate. It also tends to outperform when investors fear further losses in other markets, withdrawing their investments.
In total-return terms, which include dividend payouts, the S&P 500 at times in November has trailed cash, though is now outperforming for the year after a recent bounce. But while stocks have been massively volatile this year, cash is totally safe, which still makes it more attractive for many in comparison.
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