By Since the Federal Reserve initiated its battle against inflation, cash has reigned supreme while stocks have taken a hit. However, the allure of cash is starting to fade, with a select group of stocks catching investors’ interest.
According to Bank of America, over $80 billion of private-client money has flowed into short-term Treasury funds since the beginning of 2022. This surge came as the Federal Reserve raised short-term interest rates, leading to higher yields on short-term Treasury debt and prompting banks to offer more attractive yields on deposits.
The one-month Treasury bill has climbed to approximately 5.3% at times, nearing its highest level since 2007. This becomes appealing for investors since it comfortably surpasses the recent rate of inflation, and unlike stocks, it is not subject to unpredictable declines.
However, the rush towards cash-like investments has led to portfolios becoming bloated with them. Cash now comprises about 13% of the average Bank of America private-client portfolio, up from around 10% earlier this year. Historically, cash holdings tend to decrease when they reach such high levels.
While investors poured their money into cash-like investments, stocks faced significant challenges. The S&P 500 remains 13% below its record high from early 2022 when the Federal Reserve began raising interest rates to curb demand for goods and services.
Bank of America clients have decreased their equity allocations to approximately 58% of their portfolios, down from a recent peak of 66%. Generally, they rarely drop below 56%, except during extreme events like the lockdowns in early 2020.
Considering the current scenario where investors possess substantial amounts of cash and reduced stock holdings, a reversal seems likely. As interest on cash flows in, investors must decide what to do with that money. Given the outlook for monetary policy, stocks could present an attractive option moving forward.
The Changing Flow of Investments
The Stock Market: A Viable Option?
What Appeals to the Stock Market?
Defensive Sectors Take Center Stage
Promising Opportunities
Now is the time to keep a close eye on these stocks and seize the opportunities they present.
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