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

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 25, 2017. REUTERS/Brendan McDermid

Wall Street is bracing for more volatility in the stock market next year, and some strategists even suspect that we’re not far from the end of this bull market.
Against this backdrop, a comparativey 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 to for dip-buyers.

“When cash is earning you somewhere in the 2% to 2.5% range, it should be on the table,” said Andrea DiCenso, a co-portfolio manager at Loomis Sayles, during a recent press briefing in New York.

“In our multi-asset 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?'”

The colorful quilt of asset-class returns below illustrates why portfolio managers like DiCenso have rightly shunned cash for the last couple of years. Represented in deep purple, the graphic shows that cash underperformed fixed income, the S&P 500, and the Russell 2000 for much of the post-crisis era.

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 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 quant strategy at Bank of America Merrill Lynch.

“But cash is now competitive and will likely grow more so.”

Subramanian noted that the 3-month Treasury bill already yields more than 60% of stocks on the S&P 500.

The big challenge for investors in 2019

Subramanian forecasts 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 …read more

Source:: Business Insider


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