Stocks are the better long-term bet, strategist says

• Retail and institutional investors hold a record close to $5 trillion in cash and cash equivalents held in money market accounts.
• Cash is attractive at a time when bond yields are rising and stocks are retreating.
• But there are four reasons why investors should put some of their money into stocks, says Riverfront Investment Group’s top strategist.

Cash is no longer garbage as its appeal grows with rising yields and this year’s stock rally is losing momentum, but there are reasons for investors to be cautious about putting the bulk of their money into that asset class, said one veteran market strategist.

There is a record $4.8 trillion in cash total in money market accounts, according to the Investment Company Institute, with retail investors alone adding $9.9 billion to their money market funds in the past week to bring the total in those accounts to $1.79 trillion.

Such capital flows underscore a new undercurrent of unease that has since overshadowed the optimism of the S&P 500 rally of nearly 9% earlier this year.

Investors are eager to allocate a larger portion of their long-term investment funds to cash and cash equivalents such as money markets, treasury bills and certificates of deposit, Doug Sandler, head of global strategy at Riverfront Investment Group, wrote in a note this week warning investors to be wary of the lure of cash.

“Cash feels safe during a crisis, but there is a cost involved,” he said. “After the crash, many investors become more cautious, even though the probability of another crash is not greater,” said the strategist with more than 30 years of experience in the field.

With the latest market sell-off, the desire to hold cash may increase further. The S&P 500 posted a third weekly loss, fueled by higher-than-expected inflation data, including Friday’s PCE index report. Meanwhile, government bond yields are rising on expectations that the Federal Reserve could raise rates more than expected. The yield on 2-year Treasury bills recently rose above 4.7%, approaching the highest since 2007.

But Sandler gave four reasons not to store too much money:

1) Stocks often beat cash

Sandler pointed to the work of Wharton professor Jeremy Siegel and research partner Jeremy Schwartz, who found that stocks have outperformed bonds 79.5% of the time and have beaten cash 85.4% of the time over 10-year periods since 1871 .

2) Equities are more in line with investors’ desire for growth

Since 1926, according to Riverfront’s Price Matters valuation framework, U.S. large-cap stocks have earned real returns of about 6.4% after accounting for inflation.

“While actual returns typically vary from year to year, since then large caps have recorded positive returns in 94% of the rolling 7-year period,” Sandler said.

3) Inflation bites

Cash is not safe because inflation can sneak up on you.

“If you watch your bank account vigilantly to absorb inflation, you’ll miss it,” he said, in part because inflation “hides” by affecting investment at about 2.5% a year over the past 30 years.

And inflation is higher in desirable places for retirement or in sectors with more activity, such as travel and health care.

4) Purchasing power losses are usually more sustainable than inventory losses
Between 1926 and 2021, there hasn’t been a period where losses on a diversified basket of U.S. stocks haven’t been fully recouped, Sandler said.

But lost purchasing power usually does not return. Once prices rise, they don’t back down, except in rare cases like electronics.

Consider this, according to the AARP, just over 50 years ago (1972) coffee was $0.66 a pound, a gallon of gasoline cost $0.36, a Ford Mustang would cost you $2,510, and a postage stamp was only $0 08,” he said. .