Investors Rush to Safety of Cash at Fastest Pace Since Pandemic Stock Rout

A file photo of U.S. currency. Luis Robayo/AFP via Getty Images

With the Federal Reserve maintaining a hawkish stance, investors have been fleeing toward the safety of cash at a record pace.

In the week through Nov. 2, investors poured in $62.1 billion into cash, a note from Bank of America (BofA) said citing EPFR Global Data. Since the beginning of October, fund flows into cash have totaled $194 billion, which is the fastest pace of cash accumulation at the beginning of a quarter since Q2, 2020, when the COVID-19 pandemic triggered a panic in the markets.

BofA analysts do not expect the Fed to change its stance anytime soon due to the low unemployment rate and persistently high inflation.

For a bull market to kick in, a recession and credit events are necessary so that the Fed ends its policy tightening. “Lesson is job losses catalyst for 2023 pivot,” the note said, according to Bloomberg.

The strategists expect a “recession shock” to lead to equities bottoming out by spring next year. Once inflation, Fed rates, and the U.S. dollar peak, investors are expected to sell the currency and focus on buying high-yield bonds, 30-year treasuries, emerging market assets and small caps, the note stated.

The Fed recently pushed up its benchmark interest rate by 0.75 percentage points for the fourth consecutive time, raising it up to a range of 3.75 percent to 4.00 percent.

During a Nov. 2 press conference, Fed Chair Jerome Powell dashed hopes for a policy reversal, calling such hopes “very premature” and insisting that the agency has “still some ways to go” as far as hiking interest rates is concerned.

As the Fed raises interest rates, cash becomes an attractive investment since the value of cash holdings will move up along with rate hikes. At the same time, higher rates will dampen economic outlook and growth, risking a recession, which is bad news for stock values.

Market Forecasts

In an interview with CNBC, billionaire investor Leon Cooperman predicted the S&P 500 to potentially fall by another 20 percent, to the low 3,000 levels “sometime next year”

In past recessions, stock markets have fallen by around 35 percent from their peak, while the S&P 500 has declined by 20 percent from its recent peak so far, he pointed out.

Cooperman blamed years of carefree government spending and artificially low interest rates for putting the economy on the path of a crash.

“We’re in store for a prolonged period of low returns in the averages, and I’m looking to buy weakness not strength,” Cooperman said. “There are a lot of cheap individual stocks around.”

Speaking to Bloomberg, Mike Wilson from Morgan Stanley who predicted this year’s market decline, said that he expects the bear market to be over sometime in the first quarter of 2023.

However, if the S&P 500 “blows through 3,650 on the downside,” Wilson predicts markets will become bearish once more. The index was trading at 3,770 as of Nov. 4.