Today’s shifting market dynamics

Wednesday, March 6 at 1:00 pm CT

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Key takeaways

  • Investors today hold a near-record $5.6 trillion in cash-equivalent securities.

  • Many are taking advantage of elevated yields on shorter-term financial instruments to manage cash more efficiently.

  • Investors chastened by 2022’s bear market who retreated in 2023 to the relative safety of higher yielding cash equivalents, however, may have missed out on opportunities stemming from last year’s stock market rally.

Investors last year appeared to take advantage of the higher yield environment that emerged in the wake of 2022’s bear market as a result of the Fed’s decision to raise short-term interest rates. The Fed raised its benchmark rate eleven times between March 2022 and July 2023 from near zero percent to a range of 5.25% to 5.50%. That affected the broader fixed income market, with many short-term securities paying annualized yields of 5% or more.

“Such competitive yields may have given people a false sense of security about the benefits of lower-risk, short-term instruments,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet those who put money to work in cash-equivalent vehicles in 2023 as an alternative to stocks missed out on what proved to be an impressive year for stock market returns.” The benchmark S&P 500 stock index generated a total return of more than 26% in 2023.

“In today’s market, there is a lot of value to be found beyond cash-equivalent instruments,” says Haworth. “The key to investing is holding a diversified portfolio to meet a broad range of investment needs.” This includes longer-term bonds and stocks.


Prioritizing portfolio objectives

Haworth says it can be helpful for investors to consider how investable assets are allocated to meet both short-term and long-term goals. “Some of your funds should be positioned in cash instruments to meet more immediate needs, but money that is intended to achieve long-term objectives should be invested in assets like stocks and bonds to work toward those goals.”

“Such competitive yields may have given people a false sense of security about the benefits of lower-risk, short-term instruments,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Yet those who put money to work in cash-equivalent vehicles in 2023 as an alternative to stocks missed out on what proved to be impressive year for stock market returns.”

For cash needs, consider separating your assets into two categories:

  • Money set aside to meet current and pending cash flow needs for the next 0-to-18 months
  • Money intended to meet longer-term goals

You may want to maintain up to 18 months’ worth of assets in accounts that offer some degree of immediate liquidity. These resources can be used to meet living and lifestyle expenses, tax liabilities and to repay debts. It’s also important to maintain at least a six-month emergency fund. For these purposes, consider higher yielding checking accounts, money market savings or CDs.

For money that’s not needed in the next 18 months or so, but that may be required after that period, consider money market funds, Treasury bills and short-term bonds that may offer the potential to generate additional yield while still protecting principal.

Charts depicts yields in January 2022 versus January 2024 (as of January 5, 2024) for typical bank savings accounts, 1-year certificate of deposit, 6-month, 1-year and 2-year Treasury securities.
Bank Savings based on National Deposit Rates: Savings, as reported by the Federal Deposit Insurance Corporation (FDIC). 1-year CD rates based on National Deposit Rates: 12-month CD as reported by FDIC as of December 18, 2023. Rates for U.S. Treasury securities from U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates (data current as of January 5, 2024).

Positioning for long-term goals

Resources not needed for near-term purposes can be invested with the objective of generating more attractive, longer-term returns. “Historically speaking, a diversified portfolio emphasizing stocks and bonds will outperform cash,” says Haworth. “In fact, despite today’s elevated yields for cash vehicles, a diversified portfolio of stocks and bonds likely generated superior performance in 2023.” Haworth says investors holding money in cash that is intended to help meet long-term goals should consider ways to put it to work more effectively.

“A first step is to move cash into short-term, lower-quality fixed income instruments that pay more attractive yields given the recent change in the interest rate environment,” says Haworth. He says investment grade corporate debt provides competitive rates, with municipal bonds also offering even more attractive tax-equivalent yields for individuals in higher tax brackets. Other options to consider are FDIC-insured bank savings accounts, which typically provide immediate liquidity, and certificates of deposit, available for various holding periods. Both vehicles offer more competitive yields than was the case prior to 2022.

Haworth says another sensible step may be to consider longer-term fixed income securities. “The Fed has indicated that it is likely to begin lowering interest rates this year. If that occurs, yields will drop on short-term instruments,” says Haworth. “In this environment, locking in one-year or two-year yields on Treasury bills at today’s higher rates may be a smart move to protect short-term cash.” Haworth adds that for investors seeking to achieve long-term goals, it may be an opportune time to put more money to work in longer-term fixed income securities.

Beyond the bond market, Haworth suggests directing money back into equities. “While equity markets performed particularly well in 2023, investors should be prepared for more choppiness in the months ahead.” In this environment, dollar-cost averaging can be an effective strategy for shifting assets into stocks and bonds.


The opportunity cost of too much cash

When investors hold cash for too long, it typically results in an opportunity cost, relative to their goals and their long-term portfolio strategy. “Investors often pull money intended to achieve long-term goals out of markets after prices have already declined, then are hesitant to get back in until the markets have already recovered,” says Paul Springmeyer, senior vice president and regional investment director at U.S. Bank Private Wealth Management. “This is the risk of trying to time the market,” he says. “Too often, investors are late to return and miss a major part of the rebound.” This was true of investors who stayed out of the stock market in 2023, when the S&P 500 nearly regained all the ground it lost during 2022’s bear market.

Chart depicts S&P 500 performance: 12/31/2021 – 12/31/2023.
Source: Data compiled from WSJ.com.

How your views on risk affect your approach to cash and investments

This may be a good time to reassess your own views about risk tolerance and determine if you want to adjust your portfolio. Springmeyer says for many investors, keeping long-term money on the sidelines turns out to be counterproductive. “It’s important to stay invested for the long-term to capture the opportunities that equities and bonds ultimately generate, without having to make decisions about whether the time is right to get into the market.”

Haworth also notes that along the way, changes may be appropriate. “It’s important to regularly rebalance a portfolio to reflect how market performance has changed your asset mix and bring it back to the intended allocation based on your risk tolerance, time horizon and goals,” says Haworth.


Consider your cash management and investing opportunities

It is not possible to predict with accuracy what to expect of the equity and bond markets in the near term. But if you have long-term financial goals, you should seek reasonable opportunities to put cash to work in ways that will help you achieve those objectives. There is no single solution for every investor, but you can focus on strategies that reflect your risk appetite, time horizon and goals.

Review your financial plan with a wealth professional and explore cash management opportunities – along with your long-term investing goals – to help you capitalize on today's interest rate environment.

Note: The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

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