Last Week’s Markets in Review: Is Cash Still King?

Global equity markets finished lower for the week. In the U.S., the S&P 500 Index traded lower in each of this week’s sessions and closed the week at a level of 4,433, representing a loss of 0.54%, while the Russell Midcap Index moved -0.42% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.45% over the week. International equity performance was also lower as developed and emerging markets returned -1.38% and -2.19%, respectively. Finally, the 10-year U.S. Treasury yield ticked lower, closing the week at 1.37%.

In the past few weeks, we have brought to the attention of our readers a multitude of investors’ concerns which have included but are not limited to monetary and fiscal policy, interest rates, jobs, inflation, and global equity market volatility. Further, we have also stressed the importance of remaining invested, when appropriate, through times of volatility and not attempting to time entry or exit from markets. However, from a behavioral aspect, risk adversity will always, and should, play an essential role in investors’ decision-making when it comes to asset allocation. In this week’s market update, we will take a high-level look at investors’ current asset allocation to cash and cash equivalents when it comes to risk adversity and provide insight into potential alternative solutions for consideration.

Following the global stock market crash in 1987, then CEO of Volvo, Pehr Gyllenhammar, popularized the term “cash is king.”, This adage has rung deeply through investors’ minds ever since and in current markets has arguably become ever more popular. Consider that, according to the Investment Company Institute (ICI), as of 9/8/2021, assets held in U.S. Money Market Funds totaled approximately 4.5 trillion dollars! To put that figure into perspective, at the time of Gyllenhammar’s comments in 1987, assets in money market funds totaled just $316 billion, and following the financial crisis in 2009, totaled approximately $3.4 trillion. This high level of money” sitting on the sidelines” sheds significant light on the current adversity to risk that some investors are feeling. However, this heavy cash allocation may have certain negative consequences.

Conventional wisdom in financial planning currently suggests that single-income households should have between 6 to 12 months of expenses held in cash/money market accounts. In comparison, dual-income households should hold 3 to 6 months in cash. Holding cash higher than these levels can put a severe drag on the longer-term return potential of a portfolio. Moody’s has recently stated that the U.S. national average money market rate is just 0.05%, with certain “Jumbo Money Markets” (those that require minimum balances of $100,000) reaching rates as high as 0.55%. While a 0.55% return on your cash may seem like a great deal in the current interest rate environment, the real return (after accounting for inflation) will paint a much different picture.

As you can see in the chart below from BNP Paribas, U.S. inflation, as measured by core consumer price index (CPI), for 2021 is expected to finish at an annualized year-over-year rate of 4.2%. It is further projected to increase at 2.8% and 2.4% rates, respectively, for 2022 and 2023. These rates of inflation mean that investors holding hard cash are generating negative real returns of nearly -4.2% for this year and expected negative returns of approximately -2.8% and -2.4% for 2022 and 2023, respectively.

As can be seen from the data mentioned above, in our current inflationary environment, cash may no longer be king, and investors currently holding cash positions higher than suggested by experienced financial professionals may limit the potential returns of their portfolios. As a result, we suggest that investors shift their focus to the opportunity cost associated with having cash on the sidelines. Currently, for less risk-averse investors, the S&P 500 index trades with a dividend yield of 1.27% – nearly triple the earnings of the highest paying money markets. For more risk-averse investors, the Barclays Aggregate Bond index provides a current yield of 1.81%. With nominal yields across the entire yield curve trading below current and expected inflation rates, investing in these areas will help limit negative real returns.

While excess cash and cash equivalents may cause negative real returns in our current environment, it is still an asset class that needs to be accounted for when building an investment strategy. For these reasons, we encourage investors to work with experienced financial professionals to help develop and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

Equity Market and Fixed Income returns are from JP Morgan as of 9/17/21. Rates and Economic Calendar Data from Bloomberg as of 9/17/21. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.

Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.