Wall St Week Ahead: As markets churn, investors hide in cash despite surging inflation

A tough year in markets is leading some investors to seek refuge in cash, as they capitalize on higher interest rates and await chances to buy stocks and bonds at cheaper prices, Reuters reported.

The Federal Reserve has roiled markets in 2022 as it implements huge rate hikes in an effort to moderate the steepest inflation in 40 years. But higher rates are also translating into better rates for money market funds, which had returned virtually nothing since the pandemic began in 2020.

That’s made cash a more attractive hideout for investors seeking shelter from market gyrations – even though the highest inflation in forty years has dented its appeal.

Fund managers increased their average cash balances to 6.1% in September, the highest level in more than two decades, a widely followed survey from BofA Global Research showed.

Assets in money market funds have stayed elevated since jumping after the pandemic began, coming in at $4.44 trillion as of last month, not far from their peak of $4.67 trillion in May 2020, according to Refinitiv Lipper.

“Cash is now becoming a viable asset class because of what has happened to interest rates,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages have 10 to 15% in cash versus less than 5% typically.

“It gives me the opportunity in a couple months to look around in the financial markets and redeploy if the markets and the economy look better,” said Nolte.

Investors are looking to next week’s Fed meeting, at which the central bank is expected to enact another jumbo rate hike, following this week’s consumer price index report that came in hotter than expected.

The S&P 500 fell 4.8% in the past week and is down 18.7% this year. The ICE BofA U.S. Treasury Index (.MERG0Q0) is on pace for its biggest annual drop on record. read more

Meanwhile, taxable money market funds had returned 0.4% so far this year as of the end of August, according to the Crane 100 Money Fund index, an average of the 100 largest such funds.

The average yield in the Crane index is 2.08%, up from 0.02% at the start of the year and the highest level since July 2019.

“They are looking better and their competition is looking worse,” said Peter Crane, president of Crane Data, which publishes the money fund index.