Cash Takes a Turn as King


2022 was a year of some unexpected investment outcomes. We went into that year with news confirming that inflation would be more than transitory, but the level and impact of high inflation were not yet fully known. One of the biggest 2022 surprises was how the Federal Reserve’s aggressiveness to combat the inflationary pressures contributed to declines across public investment asset classes which do not normally move in sync. Maybe the correlation should have been obvious. In any case, the decline in valuations of most public securities gave cash its turn in the spotlight. Cash was the 2nd best performing asset class in 2022! This was surprising as cash generally performs very poorly in a high-inflation environment.

Prior to last year, the underperformance of cash as an investment asset in an inflationary period was pretty much a given. In 2022, the only better performing public asset class was commodities.  Everything else – domestic and international equities, investment grade and junk bonds, government debt, real estate, etc. – fared worse. One of the main drivers of this underperformance is straightforward. The prevalence of cheap, long-term debt played a significant part in high valuations across assets of all types. Additionally, the Federal Reserve’s rate hike program meant that fixed income instruments of any material duration did not have time to reset and absorb market moves before the next hike was within sight. This quick and dramatic regime change led to the winners of 2022 being savers, not investors. 

For the first time in a long time, it now pays to be a saver. The speed and magnitude of interest rate hikes has increased competition among retail and investment banks alike as they fight to garner cash savings. A stalwart of the online savings banking ecosystem, Synchrony Bank, now offers a High Yield savings account at 3.75%. Ally Bank, and relative newcomer Marcus, are not far behind.  Charles Schwab offers its brokerage investors access to tradable prime money funds that start at a yield of 4.27%. Short-term US treasuries are strong as well, with three-month rates coming in at 4.55% last week. That is the highest secondary market discount rate since August 9th, 2007, and is higher than 89% of all other daily discount rates of this millennium!

While these cash return rates are certainly attractive in the immediate term, it is less certain where they are headed. Recent broadcasts from the Federal Reserve have suggested a slowing of rate hikes, with potentially two 25 basis point hikes coming early this year. But how long rates remain high, or when rate increases will halt, remains to be seen. A longer-term pause, which would seem to be most beneficial to savers as it will allow for more inter-bank competition might prompt savings rates to catch up to treasury rates more broadly. However, this approach would likely place further downward pressure on investment markets. Of course, this might be an outcome that the Fed wants. Whatever the outlook, make sure your cash is working for you.

Carey Blakley