Okay Wall Streeters. Like the result or not, the election is over. Time to stop watching the polls and get back to what you do best – watching the Fed, of course.
The Federal Reserve started its rate cutting cycle with a 50 basis point bang in September, taking the proverbial ax to short term bond yields. The market expectation is that the Fed will continue to cut rates heading into 2025, albeit in less-harsh, 25-basis-point increments.
And while the longer part of the yield curve seems to be ignoring the Fed’s determination to lower the cost of money of late – check out the spike in 10-Year Treasury yields, especially since Trump’s victory – the Fed generally gets its way on the short end, which means investors will be earning less on the cash in their portfolios.
So if that is indeed the case, what should advisors and investors do with the money they’ve been holding on the sidelines?
Bobby Jones, managing director at Americana Partners, continues to have a 10-percent allocation to cash and cash equivalents for most of his clients.
“Over the past 18 months, we have taken full advantage of the attractive yields offered in the US Treasury market, where our clients have received a 5-percent-plus annualized yield while taking on US government risk,” Jones said. “While there haven’t been many pullbacks in the equity markets, we were able to invest some of our cash reserves during volatile times like October 2023 and July 2024.”
Jones said he expects there will be volatility in the coming months as investors grapple with slowing global growth, ongoing geopolitical turmoil, and the impact of the Fed’s rate decisions. And when that volatility hits, he is ready to move out of his cash position.
“We stand ready to add to risk assets during these volatile periods but are preaching patience in the near term,” he said.
Meanwhile, Mark Rich, director of investments at Procyon Partners, said he believes the benefits of reducing cash and locking in longer term rates has been diminished as the market has essentially priced in all of the Fed’s anticipated rate cuts.
“We have implemented a barbell approach to fixed income management where we incorporate cash and short-term fixed income to benefit from higher rates on the short end of the curve, and longer duration securities to protect against rates falling faster than anticipated,” Rich said. “On the municipal side, we have recommended a move out of cash into an intermediate- to longer-term municipal bond portfolio.”
For short-term investors, Tim Bartlett, senior portfolio manager at Unique Wealth, said leaving a higher percentage in cash with an approximate 5 percent yield is a good option. For longer-term investors, however, he said that as rates decline it would be a “prudent decision” to move these dollars into equities, alternatives, hedged solutions, and private credit.
Finally, Geoff Schaefer, financial planner and wealth advisor at Intergy Private Wealth, said cash is meant for short-term circumstances, and if one’s spending horizon is less than three years, then sticking with cash is more than appropriate.
“Investing is meant for the long term, not a presidential term or economic cycle. Attempting to time the market is often a foolhardy endeavor. If money in your plan and life is meant to be invested, it should be invested,” Schaefer said.
Right now, he said the biggest consideration with cash is limiting it to what one truly needs, because as rates drop, the interest on that cash will drop as well.
“If you’ve been lazy about allocating your cash because your money market fund was paying 5.5 percent, it’s time to take action. If your plan needs safer dollars, look to high-quality corporate bonds or Treasury bills. If your plan allows for longer-term investments, invest in the market,” he said.
Thirty four percent of advisors surveyed by InvestmentNews say they use direct indexing strategies but 39 percent don’t.
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