As markets churn, investors hide in cash despite surging inflation

By Lewis Krauskopf

NEW YORK (Reuters) – A troublesome yr in markets is main some traders to hunt refuge in money, as they capitalize on larger rates of interest and await probabilities to purchase shares and bonds at cheaper costs.

The Federal Reserve has roiled markets in 2022 because it implements large fee hikes in an effort to average the steepest inflation in 40 years. However larger charges are additionally translating into higher charges for cash market funds, which had returned nearly nothing for the reason that pandemic started in 2020.

That’s made money a extra engaging hideout for traders looking for shelter from market gyrations – despite the fact that the very best inflation in forty years has dented its enchantment.

Fund managers elevated their common money balances to six.1% in September, the very best degree in additional than 20 years, a broadly adopted survey from BofA World Analysis confirmed.

Belongings in cash market funds have stayed elevated since leaping after the pandemic started, coming in at $4.44 trillion as of final month, not removed from their peak of $4.67 trillion in Might 2020, in line with Refinitiv Lipper.

“Money is now changing into a viable asset class due to what has occurred to rates of interest,” mentioned Paul Nolte of Kingsview Funding Administration, who mentioned the portfolios he manages have 10 to fifteen% in money versus lower than 5% sometimes.

“It offers me the chance in a pair months to go searching within the monetary markets and redeploy if the markets and the economic system look higher,” mentioned Nolte.

Traders wish to subsequent week’s Fed assembly, at which the central financial institution is anticipated to enact one other jumbo fee hike, following this week’s shopper value index report that got here in hotter than anticipated.

The S&P 500 fell 4.8% previously week and is down 18.7% this yr. The ICE BofA U.S. Treasury Index is on tempo for its largest annual drop on document.

In the meantime, taxable cash market funds had returned 0.4% to date this yr as of the top of August, in line with the Crane 100 Cash Fund index, a median of the 100 largest such funds.

The typical yield within the Crane index is 2.08%, up from 0.02% at first of the yr and the very best degree since July 2019.

“They’re trying higher and their competitors is trying worse,” mentioned Peter Crane, president of Crane Knowledge, which publishes the cash fund index.

In fact, sitting in money has its drawbacks, together with the potential for lacking a sudden reversal that takes costs for shares and bonds larger. Inflation, which stood at 8.3% on an annual foundation final month, has additionally dented the enchantment of money.

“Actually you’re shedding some buying energy with inflation working at 8-plus p.c, however… you take some cash off the desk at a dangerous time for fairness markets,” mentioned Peter Tuz, president of Chase Funding Counsel. “Your equities could possibly be down 8% in two weeks.”

Whereas an apparent signal of warning amongst traders, excessive ranges of money are generally seen as a so-called contrarian indicator that bodes effectively for equities, mentioned Mark Hackett, Nationwide’s chief of funding analysis, particularly when taken in live performance with different measures of investor pessimism.

Hackett believes shares could keep risky within the near-term, amid varied dangers together with potential earnings weak point together with excessive inflation and the hawkish Fed, however he’s extra upbeat in regards to the outlook for equities over the following six months.

“There’s a level of a coiled spring growing the place if everyone is already on the sidelines in some unspecified time in the future there may be no one left to go on the sidelines and that leads you to probably any piece of fine information leading to a really outsized transfer,” Hackett mentioned.

David Kotok, chief funding officer at Cumberland Advisors, mentioned his U.S. fairness portfolio made up of exchange-traded funds is presently 48% in money after being nearly absolutely invested in fairness markets final yr.

Shares are too costly given dangers together with rising rates of interest, the potential for a Fed-induced recession and geopolitical tensions, Kotok mentioned.

“So I would like money,” Kotok mentioned. “I would like the money to have the ability to deploy again into the inventory market at decrease costs or considerably decrease costs, and I don’t know which alternative I’ll have however the one means I can seize it’s to be holding that amount of money.”

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