Stocks fell 1% last week as the rally that had started two months ago showed signs of exhaustion.
The market is currently facing a number of headwinds:
1. Extended technicals. The market is the most overbought since just after Covid, according to some measures.
2. Improved sentiment. When investors are optimistic, it tends to be bad for stocks.
3. Higher interest rates. Mary Daly, a Fed member, “doesn’t see the Fed easing interest rate hikes anytime soon”.
4. A slowing economy. The Conference Board’s Leading Economic Index has fallen over the past 6 months, which has frequently preceded recessions in the past.
In these circumstances, cash may be a decent investment, argues Morgan Stanley.
While “USD cash underperformed both the S&P 500 and the US 10-year every year from 2010 to 2020 except two,” notes MS, it offers a high current yield, liquidity and “a better 12-month total return than our strategy forecasts imply for US equities ($SPX500), US Treasuries ($TLT) and either US IG or HY credit ($LQD $HYG),” with considerably less volatility.
We tend to agree. US short-term interest rates are at their highest level since 2007, and in our view, for the first time in 15 years, cash is a reasonable investment. Thus, we hold a large position in $JPST .
In the longer run, cash will be beaten by other, riskier investments.
However, in our view, the time to move up the risk scale will come in 2023 when the economy bottoms.
The position in $JPST was increased.