Wall Street Week Ahead: With Markets Volatile, Investors Hide in Liquidity Despite High Inflation

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, US, December 28, 2016. REUTERS/Andrew Kelly

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NEW YORK (Reuters) – A tough year in the markets has led some investors to seek a haven for cash, taking advantage of higher interest rates and waiting for opportunities to buy stocks and bonds at cheaper rates.

The Federal Reserve disrupted markets in 2022 as it raised interest rates dramatically in an attempt to dampen the most severe inflation in 40 years. But the higher rates also translate into better rates for money market funds, which have achieved almost nothing since the pandemic began in 2020.

That cash has made a cache more attractive to investors seeking shelter from market volatility – although the highest rate of inflation in forty years has dampened its appeal.

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A widely followed survey from BofA Global Research showed that fund managers increased their average cash balances to 6.1% in September, the highest level in more than two decades.

Assets in money market funds have remained high since they jumped after the pandemic began, reaching $4.44 trillion as of last month, not far from a peak of $4.67 trillion in May 2020, according to the Refinitiv Lipper.

“Cash is now a viable asset class because of what happened to interest rates,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages have 10-15% cash in versus typically less than 5%.

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“It gives me the opportunity in two months to look around the financial markets and re-spread if the markets and the economy are looking better,” Nolte said.

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Investors are looking forward to next week’s Federal Reserve meeting, where the central bank is expected to raise interest rates again, following this week’s higher-than-expected CPI report. Read more

The S&P 500 is down 4.8% in the past week and has fallen by 18.7% this year. US Treasury Index ICE BofA (.MERG0Q0) Fast paced for biggest annual drop ever. Read more

Meanwhile, taxable money market funds have returned 0.4% so far this year through the end of August, according to the Crane 100 Money Fund Index, the average of the 100 largest such funds.

The average return for the Crane 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 fund index.

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Of course, sitting in cash has its drawbacks, including the potential for missing out on a sudden reversal that raises stock and bond prices. Inflation, which came in at 8.3% year-on-year last month, has also dampened the liquidity appeal.

“Sure, you’re losing some purchasing power with inflation soaring to eight percent, but you’re … taking some money off the table at a very risky time for the stock markets,” said Peter Toze, president of Chase Investment Consulting. “Your stock could drop 8% in two weeks.”

Mark Hackett, head of investment research at Nationwide, said that while there is a clear sign of caution among investors, extreme levels of cash are sometimes seen as a contradictory indicator that bodes well for stocks, especially when taken in concert with other measures of investor pessimism. .

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Hackett believes stocks may remain volatile in the near term, amid various risks including potential earnings weakness along with rising inflation and Fed hawks, but he is more optimistic about the outlook for stocks over the next six months.

“There is a bit of a coiled spring developing where if everyone is already on the sidelines at some point, there is no one to go to the sidelines and that leads you to any potential good news that leads to a very big move,” Hackett said. .

David Kotok, chief investment officer at Cumberland Advisors, said his portfolio of US stocks made up of ETFs is currently 48% in cash after investing almost entirely in stock markets last year.

Kotok said stocks are too expensive due to risks including higher interest rates, the possibility of a Fed recession and geopolitical tensions.

“So I want money,” Kotok said. “I want the cash to be able to be republished in the stock market at significantly lower or lower prices, and I don’t know what opportunity I will have but the only way I can seize it is to keep that amount of cash.”

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(Reporting by Louis Krauskopf) Editing by Ira Yosibashvili and Diane Kraft

Our criteria: Thomson Reuters Trust Principles.

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