Not so long ago, money market funds and other cash-based investments were said to be “cash is garbage” because returns were close to zero. However, in March 2022, the Federal Reserve began raising short-term interest rates, and many cash vehicles now pay interest rates above 5%. But the recent excitement over cash has dampened as the Federal Reserve announced its intention to cut interest rates (the policy committee expects a cut of three quarter points this year).
In its just-released April overview, Ned Davis Research changed its recommended asset allocation to zero cash, down from 9% in March. The cash segment allocation is now 70%, up from 61% previously. Bonds remain at 30%, even though bond prices could rise if the Fed cuts the federal funds rate.
At the same time, the company strengthened its bullish outlook on gold. Davis did not include gold or other commodities in his proposed allocation, but argued that bullion would continue to rise and deserve an overweight designation along with equities.
Tim Hayes, chief global investment strategist at Davis, told investors in a brief that both asset classes will outperform the other in 2024, with a continued “uptrend in gold and equities.” He advised me to pay attention. As of last Friday, gold is up 12.9% year-to-date, and the S&P 500 is up 9.1%. As for bonds, the Bloomberg U.S. Composite Index is down 1.8%, likely reflecting his fears that the Fed’s rate cuts may be delayed.
Today, Hayes says, “equities and gold require heavy exposure. Bonds and cash do not.”
The situation was very different from two years ago, when the Federal Reserve began tightening measures aimed at curbing soaring inflation. “For the first time since 2013, we moved to overweight cash,” Hayes said in his April review. We remain underweight on stocks in 2022. In 2022, stocks, bonds, and gold all lost value. When interest rates rise, gold typically falls, as interest-bearing assets such as bonds look more attractive on a relative basis. Of course, gold has no interest or dividends.
And in 2023, the rise in inflation subsided, stocks and gold performed well, and bonds rose slightly to surplus. “By April 2023, gold became the first asset to post a greater one-year return than cash, followed by stocks later that year,” Hayes wrote. This trend will further improve in 2024. Recently, gold has shown a “golden cross” where the 50-day moving price average exceeds the 200-day average, indicating that the recent price rally is accelerating, which is a bullish signal for quants.
What ruins Hayes’ rosy scenario of overemphasis on stocks and gold? He signaled that the benchmark 10-year U.S. Treasury yield could continue to rise, yielding about 4.4% as of Friday, up from 3.8% at the start of the year. One of the reasons he often discusses is the fear that the decline in inflation has stalled. The March consumer price index, due out on Wednesday, could raise expectations for “inflation stickiness.”
Another potential problem for stocks and gold is that speculators could push the prices of these assets too high, resulting in a painful correction. But Hayes pointedly added that he saw no evidence of such bubbling.
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Tags: AGG, Asset Allocation, Bonds, Cash, Consumer Price Index, Federal R4eserve, Golden Cross, Inflation, Ned Davis Research, S&P 500, Speculator, Stocks, Tim Hayes
