Cash-loving investors dig in even as US rate cuts threaten payouts

A GOLDEN era for cash may be winding down as the US Federal Reserve gets ready to cut interest rates. Many fans of the investment class are staying put anyway.

Assets in US money markets hit a record of US$6.24 trillion this month, data from the Investment Company Institute showed last Wednesday (Aug 21).

This comes even as markets became increasingly confident that the Federal Reserve was gearing up to lower rates at its meeting from Sep 17 to 18.

Those reductions are expected to eventually pull yields in money markets down from above 5 per cent, a rate unimaginable a few years ago.

However, there is little evidence so far that individual investors are abandoning cash to chase returns in stocks and bonds.

Data analysis firm EPFR showed that about US$100 billion flowed into money markets in August.

“We don’t feel any need to move our money,” said Vance Arnold, a 71-year-old retired teacher and baseball coach. He has about 80 per cent of his seven-figure portfolio in money markets and other cash equivalents.

Money-market yields went from near-zero to “4.5 per cent, 4.7 per cent, and now we’re over 5.2 per cent. I can live with 4.5 per cent again”, he said.

The durability of money markets is a recent example of how cash has re-emerged as an asset class that can compete with stocks and bonds. This is one of the most striking shifts in the post-Covid investment landscape.

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Despite heady returns in stocks and expectations that the Federal Reserve will cut rates, money market funds tracker Crane Data showed that assets in money markets have grown by US$313 billion this year.

Cash is seen as one of the safest and most liquid asset classes, boosting its appeal to retirees and investors looking to get paid while staying on the sidelines.

Though yields are expected to fall in coming months, projections show them stopping well short of the near-zero levels of a few years ago, when hedge fund legend Ray Dalio famously declared cash “trash”.

Clients are also hanging onto cash because of worries about rich stock valuations following an 18 per cent year-to-date rally that has taken the S&P 500 to record highs, as well as uncertainty ahead of the US presidential election, wealth advisers said.

Missing out?

But investors holding too much cash could miss out on the often superior returns of other asset classes.

Cash has returned an average of 2 per cent in the 12 months after the Federal Reserve starts cutting interest rates, showed a study of rate-cutting cycles since 1928 by Hartford Funds.

Stocks have returned 11 per cent, while US Treasury bonds gained 5 per cent.

Anne Marie Stonich, chief wealth strategist at Coldstream Wealth Management, has been urging clients to move out of cash and into assets such as government bonds, where they can lock in yields if they hold the securities to term.

The efforts have met resistance from cash-loving investors, she said.

“It’s easy to have been complacent, but now it’s time to wake up and pay attention to moving your cash onward,” the strategist added.

Investors’ dedication to cash could be tested if a weakening economy prompts the Federal Reserve to cut rates faster or deeper than expected.

Such a scenario could conversely raise the appeal of haven assets if growth worries prompt a stock selloff.

Traders will be watching US employment data on Sep 6 to see if the labour-market weakness that roiled markets in late July and early August has dissipated.

Futures tied to the central bank’s main policy rate show markets pricing about two percentage points in rate cuts over the next year.

Wary investors

The latest inflows into money-market funds included money from institutional investors seeking to lock in yields ahead of the Federal Reserve cuts, EPFR’s data showed.

Yet cash is also popular with individual investors, who have accounted for more than US$4 trillion of the funds currently in money markets, showed data from the Federal Reserve Bank of St Louis.

A tiny part of that cash pile belongs to Judith Astroff, a 75-year-old systems analyst in New York, who estimates 15 per cent of her US$500,000 retirement account is sitting in money markets.

Astroff is no stranger to risk. Much of her account came from a windfall trade on shares of chipmaker Nvidia, one of the big winners from the market’s excitement over artificial intelligence.

However, she prefers cash to the volatility of stocks or locking up money in longer-term US government bonds.

“I really should take some of that money and put it somewhere that I would have a better chance of seeing some growth,” she said. But “after a phenomenal run of luck with Nvidia, I’m kind of terrified about buying anything else.”

Brian Nick, head of portfolio strategy at NewEdge Wealth, hopes to persuade clients to diversify if yields fall as expected in coming months.

“You have to convince them there’s a reason to move away from money markets but also a reason why some other asset offers a better opportunity,” he said. “That will be the approach that eventually wins out.” REUTERS