Investors Rush To Cash As Bull Market Risk Escalates

In a seismic shift from the bull market of the past decade when the value of U.S. stocks tripled, investors are trading equities for cash and cash equivalents at an accelerating pace. This comes against a background in which the S&P 500 Index (SPX) is down by 1% for the year-to-date through Tuesday, enduring two corrections of 10% or more along the way.

Now, cash and cash equivalents are on their way to be among the best performing asset classes of 2018, as illustrated in the table below. "For the first time in a long time, cash is interesting again," says Hani Redha, a multi-asset portfolio manager at PineBridge Investments, according to a story in the Wall Street Journal.

How Cash Is Crushing Stocks
Asset Class YTD Return
S&P U.S. Treasury Bill 3-6 Month Index 1.7%
S&P 500 Index (1.0%)
Bloomberg Barclays Global Aggregate Bond Index (3.0%)
MSCI ACWI (All-Country World Index of stocks) (5.1%)
Sources: The Wall Street Journal, Yahoo Finance

Significance For Investors

Desperate to preserve principal, investors have been turning to cash and cash equivalents in the face of negative returns from a wide variety of other asset classes in 2018. Among the lengthy list of losers so far this year are, per the Journal, global stocks, high-yield bonds, investment grade corporate bonds, long-term government bonds, and a variety of commodities. Even gold, which traditionally is a safe haven that performs well during times of stock market uncertainty and stress, is down by about 5%.

A Dash to Cash
"For the first time in a long time, cash is interesting again." -- Hani Redha, PineBridge Investments
Source: The Wall Street Journal

During much of the current bull market, an oft-repeated mantra among investors was "there is no alternative" to stocks, frequently abbreviated as TINA. That is, stocks were offering far superior returns compared to a wide variety of other asset classes, and thus investors were willing to put aside concerns about equity valuations that were surging ahead of historical norms.

"TINA has disappeared and now you have TIRA: there is a real alternative," Fabrizio Quirighetti, co-head of the multi-asset team at Geneva, Switzerland-based SYZ Asset Management, told the Journal. Quirighetti has increased allocations to cash and cash equivalents in conservative portfolios from about 0% to 10% during the last two months. He sees a large-scale move to cash that is "draining some liquidity out of risky assets that are not yielding enough or not rewarding enough going forward."

Looking Ahead

Leading global fund managers surveyed by Bank of America Merrill Lynch had a aggregate 4.7% of their portfolios in cash as of November, down from 5.1% in September and October, but still above the 10-year average, per the Journal. If signs of an impending bear market mount, that figure is apt to rise.

Meanwhile, BofAML also notes that 1992 - 26 years ago - was the last calendar year in which cash outperformed both stocks and bonds. With 2018 on track for a repeat, the flight to cash is certain to further depress equity prices.

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