- Steve Marcus
- Cash was the best-performing asset last year, outperforming stocks, bonds, and commodities.
- After a brutal year for investors across those asset classes, some strategists have suggested cash is an increasingly attractive investment.
- So what exactly does “going to cash” mean? Here’s what investors should know.
Cash was the best-performing asset of 2018. It reigned supreme among other investments like stocks, bonds, and commodities. Put another way, cash was the only major asset that posted positive returns last year, with a 1.9% rise, according to Bank of America Merrill Lynch.
“A perfect storm hit equities in 4Q18 – high oil prices, a strong dollar and a shift upwards in the U.S. yield curve – which altered perceptions towards risk assets and encouraged investors into cash,” Sean Darby, global head of equity strategy at Jefferies, told clients in a report last week.
In other words, investments of all stripes were hit as a confluence of macroeconomic factors – at a late stage in the decade-old economic cycle – swelled and wreaked havoc on the market.
Now, strategists across Wall Street say cash is a more compelling investment as the global economy slows, US-China trade tensions persist, and as questions swirl around the Federal Reserve’s interest-rate hiking path. Even banks doing their part to entice investors – Goldman Sachs is now offering online savings customers 2.25% on their accounts, compared to some of their competitors’ near-zero rates.
But what exactly does “going to cash” mean? Surely it must involve more than just shoving your money under a mattress.
Typically, going to cash means removing money once invested in assets like stocks or bonds which are, theoretically, meant to grow your cash at a more attractive rate than if it were to simply sit in a savings account.
“Cash,” on its own, simply means an asset in a portfolio that isn’t invested at the moment. That could also mean cash takes the form of cash-equivalent assets, like money-market funds. It should be noted that while cash-equivalent securities are typically considered safe places to park cash, investors can still lose money. Here’s a breakdown of some of those assets – traditionally defined as low-risk, low-return, but highly liquid vehicles – and what they all mean.
- Money-market funds: These securities are like checking accounts that pay investors higher interest rates on their deposits. A money-market fund that Vanguard offers individual investors, for example, is $1 per share and is among the firm’s most conservative investment options. Money-market funds saw massive inflows between October (roughly around the time when the stock market began its sell-off) through the end of last week, with investors pouring nearly $250 billion into them over that time, according to Deutsche Bank data.
- US Treasury bills: These are US Treasury-issued debt securities lent in denominations of $1,000 to $5 million. They do not pay out interest like a Treasury bond, but the investor earns the yield – the difference between the price of purchase and the value at the time of redemption – on the bill when the asset reaches maturity. Macroeconomic factors like inflation, monetary policy, and investor demand impact T-bill prices, similarly to other debt obligations.
- Commercial paper: This is a short-term, unsecured, corporation-issued debt instrument typically viewed as a liquid space, though one that’s changed dramatically since the global financial crisis. Investors buy in for returns slightly higher than Treasury bills, while taking on, theoretically, relatively little credit risk. Maturities on commercial paper range up to 270 days, but average about 30 days, according to the Federal Reserve. The assets are typically lent in denominations of $100,000. They are widely viewed as having played a key role in the crisis of 2007 to 2009 as mortgage defaults rose.
- Short-term government bonds: Government bonds with short-dated maturities are debt obligations backed by a country’s government and denominated in its currency. An example in the US would be a 2-year Treasury note. These assets are typically considered stable investments and “safe havens,” but are subject to volatility from factors like auctions and changes in monetary policy and economic conditions. Deutsche Bank told clients last week that government bond funds – mostly short-term – saw a record $23 billion inflow in December alone.