Cash is King, Retail Investors Nervous Ahead of Summer

Cash is King, Retail Investors Nervous Ahead of Summer

$DIA, $SPY, $SOX, $QQQ, $RUTX, $VXX

FLASH: Cash is King for investors heading into Summer

Increasing a cash buffer is typical during times of economic and geopolitical uncertainty.

But data from global wealth managers show that stashing cash has continued at unusually high rates even as global stocks have rallied this year on conflicting signals from central banks, mixed macroeconomic data and Washington’s trade disputes with China, Japan and the EU.

In that scenario, many US investors have been lured by the outperformance of US T-Bonds compared with total returns in US equities YTD.

Savvy individual participants have been keeping as much as 33% in cash this year, up from 23% at the end of last year, according to a client survey by UBS Asset Management.

UBS does not have historical data for global allocation, but CEO Sergio Ermotti described cash levels as astonishing and said in March US 33% holdings were at records.

Global funds on average allocated 6.4% of their portfolios to cash Q-1, the highest on records going back to Y 52013, according to Reuters’ survey.

That level shrank to 5.2% last month, but it is still above historical levels, Reuters records show.

Reflecting the caution and uncertainty spreading across markets, most UBS clients said they were waiting to pounce on the next investment opportunity, holding cash as protection against a market downturn or keeping it for an emergency when asked what their rationale is for holding so much cash.

One of the Biggest Q’s we get asked is: “when will this cycle end?”

According to Morningstar data gathered for Reuters on more than 1,000 funds, net cash allocation has remained around 3% since late last year, above the historical average of 2.7%.

Interviews with wealth managers at Morgan Stanley, JPMorgan and HSBC confirm the trend.

“Cash has been running meaningfully above average among clients,” said the CIO of Morgan Stanley Wealth Management. “Typically cash would be 5-6% of their assets. Now it is 3 to 4X more.”

Investors wonder how much longer this year’s stock market rally can last as valuations look stretched and Q-1 corporate earnings growth slowed, but they are also struggling to find alternative markets as government bond yields weaken.

Clients are questioning if there is value in this market.

Holding cash stifles activity and hurts income for banks, which are struggling with lower trading activity in general.

Late last month, UBS said the bank had seen some pick-up in client activity, but had previously described conditions as the toughest in years as revenues in its investment bank and wealth management fell.

So much cash on the sidelines undermines the idea posed by many analysts over the past month that investors have been too complacent about the headwinds, such as a breakdown in the US-China trade talks, that could threaten the stock rally during the Summer slower months.

The Summer months to the end of September are often the weakest stretch in the year.

Instead, investors were unusually cautious even before President Trump sent shudders through financial markets earlier this month tightening the noose on Beijing.

“There’s a lot of cash on the sidelines that tells us investors don’t have conviction, but it also means they’re not exposed so they won’t be forced to sell,” said chief market strategist at HSBC Private Banking. “That gives me some confidence that we won’t see a big correction in equity markets.”

While Treasuries have outperformed US stocks over the past 6 months, the strategy may not pay off in the long term. As we expect a long-term annualized return of 7.8% for global stocks based on the MSCI All Country World Index, Vs 2.8% for USD cash, measured in 1- to 3-month T-Notes.

The Big Q: What will pry retail participants out of their lethargy?

The Big A: Better economic and corporate data and an President Trump coming to good trade deals with China, Japan and the EU. Canada and Mexico are set.

Tuesday, the major US stock market indexes finished at: DJIA -237.92 at 25347.77, NAS Comp -29.66 at 7607.32, S&P 500 -23.67 at 2802.39

Volume: Trade on the NYSE came in heavy at 1.4-B/shares exchanged.

  • NAS Comp +14.7% YTD
  • S&P 500 +11.8% YTD
  • Russell 2000 +11.5% YTD
  • DJIA +8.7% YTD

HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bearish in here.

Have a terrific week.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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