It has been a very turbulent year for both the equity and bond markets, as both have suffered large losses during much of 2022. As a result of this market volatility, combined with accelerated inflation, the net worth of Americans has been steadily decreasing since January at an alarming rate. In fact, CNBC recently reported that U.S. household wealth dropped in the second quarter by a record amount, and the wealthiest have been hit the hardest. According to the Federal Reserve, the top 10% most affluent American households lost $8 trillion in stock market wealth of the total $9 trillion deficit during that period.
These conditions have created financial uncertainty and have many people asking the same question: Where can I put money during these unpredictable conditions to realize some positive financial returns?
Cash is king again
Traditionally, it used to matter a lot less what you decided to do with your cash. Of course, some cash investments have always been a core component of a diverse portfolio, but many cash strategy options historically have mostly earned in the 0.1-2% range, and when compared to the potential returns of stocks or bonds in high-flying markets, fell far short. That is until 2022 and the current market downturn that has resulted in a 20% loss for the S&P 500 and a loss of 16% for the “safe-haven” Bloomberg U.S. Aggregate Bond Index.
In the current financial environment, cash strategies provide the safest way to maximize earnings while minimizing risk. Accordingly, here are three investment deployments that we believe can provide consistent returns while minimizing exposure to the potential of further losses in the equity and bond markets:
• Money market funds
Money market accounts have several advantages. They are easy to get money in and out of, providing liquidity with the ability to access these types of accounts more than once, if needed, in a short amount of time. Some of the best money market funds currently are offering rates between 2-3%, which, compared to market returns for the year, would remain attractive.
• U.S. Treasury bills
Another safe place to put money is in Treasury bills, or T-bills. These short-term debt securities mature in increments of less than one year, and are backed by the U.S. Treasury Department, providing peace of mind as one of the most secure investments available.
Compared to their near-zero risk, Treasury bills have a good return — depending on the length of the term, current rates range between 3.50-4.80%.
T-bills have no coupon but are purchased at discounted prices and receive full principal at maturity. The interest rate determines the discounted purchase price. They are ideal for investors with less than 12-month investment horizon.
• Enhanced cash strategy
An enhanced cash strategy offers a higher yield than bank certificates of deposit and T-bills, while offering price stability similar to money market funds. The enhanced cash alternative also provides better understanding and control of risk factors compared to packaged mutual funds.
As the Fed continues to push rates higher to fight inflation, investing in an actively managed cash alternative takes advantage of the higher rates while offering the ability to minimize interest rate and credit risk. This also provides the ability to customize each portfolio’s cash flow to meet an individual’s timeline and tax situation, and provides diversification in high-credit quality, liquid securities while allowing for yield curve positioning and sector rotation to maximize portfolio yield.
Less risk, safer returns
As referenced above, Americans’ wallets have been hurting for the better part of the year. Alternative cash strategies provide a way to offset current market conditions with negligible risk and the ability to generate safer returns.
In the end, for everyone, the best strategy will be a unique personalized one — and the key to developing the optimal course of action is in creating a customized solution. That requires an understanding of each person’s individual financial needs and risk levels. This assessment should be done in consultation with a wealth management advisor that has your best interests in mind and acts according to the fiduciary standard. During these unpredictable financial times, we are ready to assist with your investment strategies.
James Story, CFA is a senior portfolio manager at Argent Trust Company in our Nashville office. He is responsible for managing Argent’s fixed income strategies that include Enhanced Cash, Short Duration, Intermediate Duration, Core, and Core Plus.