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

A street sign for Wall Street sometimes appears outside the NY STOCK MARKET (NYSE) in Manhattan, NEW YORK, U.S. December 28, 2016. REUTERS/Andrew Kelly

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NY, Sept 16 (Reuters) – A hardcore year in markets is leading some investors to get refuge in cash, because they capitalize on higher interest levels and await chances to get stocks and bonds at cheaper prices.

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

Thats made cash a far more attractive hideout for investors seeking shelter from market gyrations – despite the fact that the best inflation in forty years has dented its appeal.

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Fund managers increased their average cash balances to 6.1% in September, the best level in a lot more than 2 decades, a widely followed survey from BofA Global Research showed.

Assets in money market funds have stayed elevated since jumping following the pandemic began, to arrive at $4.44 trillion by last month, not definately not their peak of $4.67 trillion in-may 2020, in accordance with Refinitiv Lipper.

“Cash is currently learning to be a viable asset class due to what has happened to interest levels,” said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages have 10 to 15% in cash versus significantly less than 5% typically.

“It offers me the chance in a few months to check around in the financial markets and redeploy if the markets and the economy look better,” said Nolte.

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Investors want to next week’s Fed meeting, of which the central bank is likely to enact another jumbo rate hike, third , week’s consumer price index report that came in hotter than expected. read more

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

Meanwhile, taxable money market funds had returned 0.4% up to now this year by the finish of August, based on the Crane 100 Money Fund index, typically the 100 largest such funds.

The common yield in the Crane index is 2.08%, up from 0.02% in the beginning of the year and the best level since July 2019.

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

Reuters Graphics

Needless to say, sitting in cash has its drawbacks, like the chance for missing an abrupt reversal that takes charges for stocks and bonds higher. Inflation, which stood at 8.3% on an annual basis last month, in addition has dented the selling point of cash.

“Certainly you’re losing some purchasing power with inflation running at 8-plus percent, but… you’re taking some cash off the table at a risky time for equity markets,” said Peter Tuz, president of Chase Investment Counsel. “Your equities could possibly be down 8% in fourteen days.

While a clear sign of caution among investors, extreme degrees of cash are occasionally seen as a so-called contrarian indicator that bodes well for equities, said Mark Hackett, Nationwides chief of investment research, particularly when used concert with other measures of investor pessimism.

Hackett believes stocks may stay volatile in the near-term, amid various risks including potential earnings weakness alongside high inflation and the hawkish Fed, but he could be more upbeat concerning the outlook for equities on the next half a year.

“Theres a qualification of a coiled spring developing where if everybody has already been on the sidelines at some time there’s nobody left to be on the sidelines and leading one to potentially any little bit of good news producing a very outsized move,” Hackett said.

David Kotok, chief investment officer at Cumberland Advisors, said his U.S. equity portfolio comprised of exchange-traded funds happens to be 48% in cash after being almost fully committed to equity markets this past year.

Stocks are very costly given risks including rising interest levels, the prospect of a Fed-induced recession and geopolitical tensions, Kotok said.

“THEREFORE I want cash,” Kotok said. “I’d like the cash in order to deploy back to the currency markets at lower prices or substantially lower prices, and I dont know which opportunity Ill have however the only way I could seize it really is to be holding that sum of money.

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Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Diane Craft

Our Standards: The Thomson Reuters Trust Principles.

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