Wall Street’s biggest firms are suddenly embracing an asset class that has languished since the financial crisis — and it’s a competitive threat to stocks

Wall Street’s biggest firms are suddenly embracing an asset class that has languished since the financial crisis — and it’s a competitive threat to stocks


Cash is making a comeback.
Thomson Reuters

Wall Street is bracing for more volatility in the stock market next year, and some strategists suspect that we’re not far from the end of this bull market. Against this backdrop, a comparatively safe asset class that has underperformed the stock market for most of the post-crisis period is suddenly regaining its allure. According to Goldman Sachs, investor holdings of this asset are at the lowest levels in 30 years. King cash is making a grand comeback. At the end of a volatile year and on the cusp of the 10th anniversary of the bull market in stocks, investors are waking up to the reality that the good times will not last forever. Various strategists at firms from Goldman Sachs to Bank of America Merrill Lynch expect volatility to persist in 2019 such that stocks will produce lower, risk-adjusted returns. That’s where cash comes in. It’s an asset with almost no volatility, and it’s becoming more attractive as short-term interest rates rise. It’s also becoming more alluring as a cushion against wipeouts in the equity market, with cash stockpiles acting as dry powder for dip-buyers. “When cash is earning you somewhere in the 2% to 2.5% range, it should be on the table,” Andrea DiCenso, a portfolio manager at Loomis Sayles, said during a recent press briefing in New York. “In our multiasset discussions, this is the first year in any year I can remember that we actively are saying, ‘Is an allocation to cash the right thing to do at this point?'” This colorful quilt of asset-class returns illustrates why portfolio managers like DiCenso have shunned cash for the last couple of years. The graphic shows that cash, represented in deep purple, underperformed fixed income, the S&P 500, and the Russell 2000 for much of the post-crisis era. JPMorgan Asset Management This expansion has also been marked by a hunt for returns that’s pushed investors into assets riskier than government bonds, which have provided beefier yields, in addition to being comparatively safe. Investors have adopted a “there is no alternative” mindset to stocks in their quest for returns. “For most of this cycle, stocks enjoyed a lack of compelling asset-class alternatives (bonds had elevated price risk, cash yields hit rock bottom),” said Savita Subramanian, the head of US equity and quantitative strategy at Bank of America Merrill Lynch. “But cash is now competitive and will likely grow more so.” Subramanian said the three-month Treasury bill already yields more than 60% of stocks on the S&P 500. The big challenge for investors in 2019 Subramanian predicts that the S&P 500 will peak near 3,000 next year. Many of her colleagues aren’t as specific in their 2019 outlooks, but most of them expect the ongoing volatility in markets to continue. Read more: What Wall Street’s biggest firms are forecasting for the stock market in 2019, and where they say you should put your money “In an environment of rising equity market risks, single-digit stock returns, and improving cash returns, we recommend investors reduce portfolio risk by raising their allocation to cash relative to stocks,” David Kostin, the chief US equity strategist at Goldman, said in his 2019 outlook note. Kostin said the biggest investment challenge for portfolio managers in 2019 would be that earnings and economic growth would slow down, but no one would be able to pinpoint the terminus of this cycle. Put differently, the directions of earnings and economic growth would be positive, but the rates of change would slow at in an unpredictable way. Kostin recommends that investors start taking defensive positions ahead of the slowdowns. Practically, he advised an underweight position in cyclical sectors of the stock market that benefit when the economy is improving. And, he said, piling on cash would also work as a defensive strategy for investors. He said households, mutual funds, pension funds, and foreign investors own 12% in cash as a share of their total assets — the lowest level in 30 years. This trend was corroborated by a survey of 500 institutional investors conducted by Natixis Investment Managers, which found that merely 5% of portfolios consisted of cash. David Lafferty, the chief market strategist at Natixis, said there are practical reasons why these massive investors have been reluctant to hold cash, including boards and pension-plan consultants who push managers into owning higher-yielding assets. “I don’t think we’re ever going to see pension plans say, ‘We’re backing up the truck on cash,'” Lafferty said at his firm’s briefing. “That’s politically not something they can do. But I do think when they start to put it into their capital market assumptions — to [DiCenso’s] point — it doesn’t fall off the bottom of the page anymore. It’s part of the conversation, even if they don’t want to say it out loud.”
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