Cash is a huge hit in 2015 - October 11, 2015

Cash is a huge hit in 2015

Cash had a great year so far, might outperform both the stock and bond market, which has not happened since 1990. It is all down to the fact that liquidity has peaked and to the concern that Fed would raise rates.

Since the beginning of the year, global stocks are 6% negative and government bonds are 2.9% negative – says MarketWatch, based on Bank of America Merrill Lynch’s analysis. Meanwhile, the US dollar is up 6% but commodities are down 17% and the cash is flat.

If this trend continues, for the first time in 25 years, cash returns more than stocks or bonds.

This can mean that as recently liquidity has peaked due to the liberal frameworks of the developed countries’ Central Banks, this might have led to the highest available yields too.

Liquidity has peaked

Let’s see what is behind all this: simply while the European Central Bank and the Bank of Japan continues to provide quantitative easing, the Fed is expected to hike rates for a long time, moreover, it stopped purchasing assets. As always, the US is one step ahead with monetary politics and the Fed sets the pace, it seems though that with the help of the market, the Janet Yellen led central bank will fall into its own trap.

As the QE has been tapered out, the Federal Reserve is about to – after nine years – raise interest rate which drives the market operators to calculate with the impact of the monetary policy.

Of course, it is not the launch of the interest rate hike that will break the 6-year long stock market rise, as they could have raised during the times of the tightening monetary politics in the middle of 2000. Moreover, the current market does not expect an interest rate hike for the same period of time and to the same degree as 10-12 years ago.

In terms of savings, there’s nothing new under the sun: the close to zero inflation and yield environment motivate the investors and the people to rather choose cash and stocks or even real assets over bank deposits.

No chaos so far

The report also makes it clear that there is no need to panic yet. Although, in the last few weeks the market headed for a bigger correction due to the growing risks (and to far less optimistic reports), bank specialist thinks we can still be optimistic.

For instance, the credit and bond market has not done anything “out of line” yet, which definitely means something good. In the event of a panic following a less strict quantitative easing politics, it would result in falling stock prices and rising bond yields. So far, both the housing and the labour market show signs of stability, and they do not seem to take a negative turn.


The S&P 500 index exchange rate chart in 2015

The report also tries to provide an answer to what could help the current global situation to increase risk-on sentiment. Let’s take a look at the “watch list”.

  • Although stock market strategists lowered from 2200 point to 2100 point the year-end target for the S&P 500, they said that the 1850 points could be the possible defence zone for the markets in the future.
  • In addition, it would be extremely important that oil prices avoid an other hollow point.
  • The interest rate rise on the emerging markets and the new reforms could launch improvements that could even lead to strengthen their currencies.
  • Likewise, more improvement in China’s export growth would avoid further yuan devaluation.
  • One more thing to watch: the US economy needs to perform well, the domestic demand should increase as all these factors have a positive impact on the exchange rate of the risk assets.
  • Yet, the most important thing is to stabilise investor confidence and be able to view the recent price action as a temporary correction which has been waited for a long time. The moment that the fear of the bear market occurs, serious problems will follow.

Don't put all your eggs in one basket

In this year, it seems, that keeping investments in USD instead of rouble or other currency was a good idea. Nonetheless, diversification is one of the most important technique that can reduce risk by allocating investments among various financial instruments i.e. stocks, bonds, commodities, mutual funds, cash or even real estates. Although, it does not guarantee against loss, diversification is the most important component of reaching long-range financial goal while minimizing risk. When making investment decisions, we have to choose assets whose values do not move up and down in perfect synchrony.Diversification relies on the lack of a tight positive correlation among the assets' return. That’s why a diversified portfolio will have less risk.