- “Cash is cool again,” according to the $2.78 trillion asset manager State Street Global Advisors.
- As the Fed raises interest rates, cash and other short-duration instruments are starting to earn more than many stocks.
It’s official: “Cash is cool again.”
That’s according to State Street Global Advisors, a $2.78 trillion asset manager that’s advising clients to explore cash as a safer alternative to some stocks.
Cash has taken on a tarnished reputation since the financial crisis as a conservative alternative to the stock market, which bottomed in March 2009 and has been in a bull market since.
The quilt below shows the return of various asset classes, and just how costly it’s been to sit in cash, relative to other safety nets. From 2007 through 2017, cash earned 8.4%, trailing developed-government bonds by 39.5 percentage points, according to data compiled by Citi.
State Street is not calling for a bearish, all-out rotation away from other assets that have historically performed better, even if they’re riskier. Rather, it reckons the “there-is-no-alternative” narrative about stocks no longer exists.
“With the Federal Reserve continuing to hike rates, cash and short duration exposures have become attractive sources of income in addition to tempering duration and equity risk,” State Street said in its recently published mid-year outlook.
State Street further observed that as of May 22, US 3-month LIBOR yielded more than 30% of US stocks. A year earlier, it was more than 66% of stocks.
“Given bonds’ performance since the end of 2016 and their current composure based on yield, duration and credit spread, investors may be well served to focus on their short-term positions, focusing on floating rates (investment grade and senior loans) that have the most optimal yield and duration exposure (yield per unit of duration),” State Street said.
Besides its use as a safe haven, cash may also come in handy if investors’ worst concerns about inflation don’t materialize. Higher inflation erodes the buying power of the dollar.
“After nine years of not being able to use cash in our business, it would be interesting to bring cash back as an asset class,” John Augustine, the chief investment officer at Huntington Private Bank, told Business Insider in a recent interview. “Maybe by Q1 next year, if inflation holds constant.”
To take advantage of cash and cash equivalents, State Street suggested four of its SPDR exchange-traded funds:
- SPDR Bloomberg Barclays Investment Grade Floating Rate ETF
- SPDR Blackstone/GSO Senior Loan ETF
- SPDR Portfolio Short Term Corporate Bond ETF
- SPDR DoubleLine Short Duration Total Return Tactical ETF