Investors with $6.5 Trillion Cash Amidst Anticipated Fed Rate Cuts: Where Should They Invest?
In recent weeks, investors have been closely watching the Federal Reserve’s stance on interest-rate cuts. The central bank’s pushback on expectations for rate cuts has led investors to be cautious and park their cash in money-market funds. In fact, a record $6.48 trillion has been stashed away in U.S. money-market funds through the end of January, as reported by Crane Data.
The change in sentiment began when Fed Chairman Jerome Powell indicated in a late January policy meeting that a rate cut in March was unlikely. He further emphasized this point in a CBS News “60 Minutes” interview, where he highlighted the need for caution due to inflation not yet being convincingly tamed. This news put a damper on the market’s previous optimism about lower interest rates.
While the equity market may not have noticed this shift, the bond market certainly did. Many benchmark bond indexes returned to negative territory in February, with the 10-year Treasury yield climbing to 4.186%, the highest since mid-December. George Catrambone, head of fixed income at DWS Group, noted that Powell’s actions were necessary to guard against a reacceleration of inflation.
With the consumer-price index (CPI) for January set to be released next Tuesday, investors are eagerly awaiting the results. The CPI is seen as the “main event” of the week, especially after a strong January jobs report and data showing a 3.3% growth in the U.S. economy in the fourth quarter. While the Fed is pleased with the progress made in inflation reduction, Catrambone believes that more progress is needed.
Given this backdrop, Catrambone recommends investing in the front-end of the Treasury yield curve, particularly with rates on 6-month Treasury bills above 5% for nearly a year. He believes that while the bar to cut rates is high, the bar to raise them is even higher.
In contrast to the cautious tone in the bond market, U.S. stocks have been on a record-setting spree. The Dow Jones Industrial Average and the S&P 500 index have both reached new highs in 2024, with the Nasdaq Composite Index not far behind. Adam Hetts, global head of multiasset at Janus Henderson Investors, highlights the temptation for investors to stay in cash, especially after recession concerns were prevalent for a long time. However, he cautions against being overweight in cash, as it can be toxic for long-term financial planning. Hetts recommends a more traditional 60:40 allocation to stocks and bonds, given the higher yields available in intermediate-duration fixed income.
While cash parked in money-market funds has been earning around 5%, investors should consider diversifying their investments to achieve long-term growth. Being too focused on the recession crystal ball and avoiding stocks may result in missed opportunities for significant gains. For example, the S&P 500 has seen a roughly 23% advance in the past 12 months.
In conclusion, investors with $6.5 trillion in cash are facing a challenging investment landscape amidst anticipated Fed rate cuts. The cautious stance in the bond market and the record-setting performance of U.S. stocks present different investment options. While money-market funds provide short-term liquidity and attractive returns, investors should also consider diversifying their portfolios with a mix of stocks and bonds to achieve long-term growth. As market conditions continue to evolve, it is crucial for investors to stay informed and adapt their strategies accordingly.
