High-Yielding Cash Is Pummeling Stocks

Pain intensified last week, when Fed Chair Jerome Powell signaled that the central bank will keep policy restrictive “for some time” to push the inflation rate back to the central bank’s 2% target, keeping borrowing costs high in the process.

“If I can earn, say, 5.5% in a risk-free investment, particularly if I believe that there’s going to be a lot of volatility in the stock market, heck yeah, absolutely,” David Spika, president and chief investment officer of GuideStone Capital Management, said in an interview. “The good news is there are options for investors — you don’t have to take the risk of the equity market — you can benefit from the yields we’re seeing in fixed income and money markets.”

Bears on a Roll

While higher rates are boosting the allure of cash, they’re one of the biggest concerns plaguing stock bulls at the moment. Funding costs are growing increasingly expensive as inflation-adjusted yields hover near decade-highs, threatening to pressure companies big and small.

That’s feeding into concerns over tech shares, because their long-term earnings prospects now have to be discounted at higher rates.

Given that backdrop, hedge funds are ramping up their bets against stocks, driving net leverage to the lowest levels since the depths of the pandemic. Meanwhile, a Goldman basket of the most-shorted stocks is down more than 11% this month, handing bears a handsome profit.

With the labor market still strong and inflation above the Fed’s target, policymakers forecast fewer rate cuts than previously anticipated at last week’s policy meeting. That should keep cash yields appealing for the foreseeable future, said Winnie Cisar, global head of credit strategy at CreditSights Inc.

“So long as the Fed is at elevated rates, cash is king,” Cisar said. “If you fully believe what the Fed is saying/telegraphing in its SEP and statements, then cash is going to be the likely big winner.”

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