Many investors have chosen to remain in cash over recent months, with some money market funds paying over 5%. Yields have risen sharply since 2022 as the U.S. Federal Reserve started to raise interest rates aggressively to combat inflation. In May, the yield on the 30-day U.S. Treasury bill climbed above 5%, and it’s remained there since, Wells Fargo Investment Institute said in an Aug. 28 note. “As cash yields remain elevated and inflation has cooled significantly from last year’s levels, cash yields moved into positive territory on a real, inflation-adjusted basis after a few years of negative real yields,” said Veronica Willis, global investment strategist at the firm. “This shift to a positive real cash yield environment has prompted investors to question if now is the time to increase cash holdings or hold on to cash to wait for a better opportunity to enter the market,” it added. The pros weigh in on whether it’s a good idea to stay in cash for the remainder of the year. Cash to ‘outperform’ stocks In a Sept. 7 note, Barclays said it believes cash will, in the fourth quarter, outperform stocks for a second straight quarter. It said this thesis “largely holds true:” In an environment where investors can “comfortably sit in cash” with 5.4% yields, it’s “unreasonable” to expect significant outperformance from stocks or bonds. While Barclays expects some weakness in U.S. gross domestic product growth in the first half of 2024, it thinks there will still be a higher-for-longer rate regime. That means there isn’t yet a “strong case” for owning duration — meaning long-dated bonds or stocks — but also that interest rates in the U.S. are likely to diverge from that of other markets. “Meanwhile, a stagnant European economy and a weaker-for-longer Chinese economy make pockets of cyclicals in FX, equities and commodities look unattractive. So, for a second straight quarter, we prefer the company of cash over stocks and bonds,” Barclays wrote, describing major asset classes as “still unattractive.” Goldman’s chief U.S. equity strategist David Kostin told CNBC’s ” Squawk on the Street ” this week that almost $1 trillion has moved into money market funds this year, and given the income investors get from cash, it’s a “pretty attractive alternative to equities.” “The relative attractiveness of cash is actually pretty strong in this environment. And that is where a lot of the money is gone on the margin,” he said. “And the likelihood is you have money that goes from equities more into cash.” JPMorgan said in a Sept. 11 note that it’s trimming 1% of its position in government bonds — and allocating that to cash. That’s “given the potential for the commodity price surge to feed inflation and extend central banks’ hiking cycles,” it said. Billionaire investor Ray Dalio, founder of Bridgewater Associates, sounded a similar tune. He said on Thursday at the Milken Institute Asia Summit in Singapore that he’s steering clear of bonds and prefers cash right now. Perils of holding cash in the long term While investors might be tempted to increase their cash holdings to benefit from elevated yields, that can have “unintended consequences,” said Willis of Wells Fargo Investment Institute. “Even if cash yields remain elevated in the short term, cash will likely underperform other growth assets over the long term, putting a drag on long-term performance,” she said, adding that history has shown even a “very conservative” portfolio allocation has had higher returns than cash over long periods of time. “While we do not expect a return to the ultra-low cash yield environment of the past decade or so, we do expect every strategic asset class to outperform cash over the long term based on our capital market assumptions,” she added. U.K. asset management firm Schroders said in a Sept. 14 note that while holding cash “for flexibility” is prudent, it believes it’s time to start thinking long term. In light of expectations that there could be a downturn later this year or in early 2024, the firm said adding longer-dated bonds instead — therefore locking in high yields — could “prove valuable.” “We think investors may not fully appreciate the risks of continuing to overweight short-term investments or cash nor the yield cushion bonds currently offer against further price declines,” the asset manager said. It said the market consensus is that interest rates will be on a lower trajectory over the next 12 to 24 months. “If short-term interest rates fall, short-term investments or cash investors will need to reinvest at a lower rate, reducing future returns. When investors buy longer maturity bonds, they are exposed to less reinvestment risk,” Schroders said. — CNBC’s Amala Balakrishner and Michael Bloom contributed to this report.
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