Investors are becoming increasingly comfortable holding larger cash positions, as evidenced by Bank of America (NYSE:BAC). Indeed, the bank saw $47 billion flow into cash-like holdings and money-market funds last week – a record. By comparison, stock funds only attracted $11 billion in new money during the same period. The reasons for moving to cash are many, including higher interest rates, rising earnings multiples, and an overall increase in caution as FOMO (fear of missing out) fades. However, investors aren’t necessarily bearish on stocks; they just want to be pickier when vetting opportunities.
The term “cash” here means anything that is marketable and can easily be liquidated in a T+1 settlement time frame. This includes bank money market accounts, brokerage money market funds, Treasury bills, and even negotiable Certificates of Deposit (CDs).
Cash Allocation Rising
The investment trend towards cash reflects a conscious rebalancing by investors. For instance, last year, Bank of America’s private clients steered their average cash holdings to 10% from 13%. This was below the long-term average cash allocation of just over 12%. Investors are now moving back into cash equivalents because they had allocated so much to equities.
In fact, using Bank of America client numbers, investors are coming off a year when they pushed their equity holdings to a three-year high of nearly 63%. Today, they are seen as locking in gains to have dry powder for whatever opportunity may present itself. Similarly, professional portfolio managers are moving back into cash for safety and investment ammunition at the ready.
As further evidence, the pace of flows into money-market funds is on track to reach over $600 billion in 2024, according to Bank of America. By comparison, the stock market’s pace has inflows reaching less than $500 billion this year.
Yields and Safety Are Appealing
The appeal of cash is clear. Short-term Treasury bills are offering yields of around 5%. These are attractive returns, especially in light of the perceived risk in the stock market, and savvy investors are figuring that out. The shift in allocation comes as the Federal Reserve demonstrates its resolve to keep rates at current levels until inflation subsides.
Stock Market Vulnerability
The Fed’s steadfast position on interest rates, while aimed at curbing inflation, hopes to succeed by slowing economic growth. This, in turn, can limit future corporate profits. For stock market investors, this is problematic because current stock valuations are already based on optimistic profit forecasts. With three major indexes already up double digits since October, any downward revision of profit expectations could trigger a market correction.
This is what many investors are watching for when they analyze the positive trendlines and still allocate a little more away from stocks. But instead of being bearish for the market, this could be viewed as neutral to bullish as investors are sitting with cash to buy the dips when they occur, causing them to be short-lived.
Key Takeaway – Cash Can Be a Valuable Investment Tool
The increase in cash allocations highlights that cash can be a valuable investment tool. While it won’t make you rich, in a volatile market, it offers safety, a hedge against inflation through higher yields, and the ability to take advantage of buying opportunities when they occur. As investors navigate an uncertain economic landscape, strategic use of cash can play a key role in their portfolio management.
