Cash assets under management are at $7.8 Trillion according to Bank of America. This is an astounding number, and, in many cases, investors could look at this number as a sure sign of economic fear globally. In fact, as it currently stands, this number factors heavily in to BofA’s “Bull & Bear” indicator, which currently sits at 3.2 on a scale of 0-10, where 0 is most bearish. Most people think of keeping wealth in cash as a lack of investment. We’re conditioned to think of bank deposits as returning fractions of a percent, and as such, there is a huge opportunity cost to carrying cash.
Over the last few months, there have been significant inflows into large cap stocks and bonds as well, but cash has seen a huge increase. What exactly does that mean? Investors have clearly been bullish about stocks (particularly big tech), they seem to be value buying bonds, but shouldn’t cash be the loser in that scenario? Not necessarily. As of this writing, the S&P 500 has an earnings yield less than 4%, bonds as measured by the S&P US Aggregate, currently yield 5.08% yield to worst, and money markets yields, as measured by the Fidelity Government Cash Reserves Fund, yield 4.78%. In this environment we ask, is cash an indication of fear? Or is it the better investment on a risk adjusted basis?
On some level this is really a ridiculous question. Historically, these numbers may be relatively normal for money market funds. Despite recent events, cash does have a real yield. But stock and bond yields are generally higher. Private Equity and Private Real Estate are all usually higher as well. But with the costs of capital relatively uncertain, valuations still high, and banks tightening lending practices, cash is arguably the best call until the market figures out what equilibrium levels of interest rates look like. Can stocks and bonds hang in while the Fed figures that out? Yes, but each increase in rates makes the choice to stay in risk assets more difficult.