Count Goldman Sachs among the major Wall Street firms that are warming up to cash amid of period of heavy uncertainty for both stocks and bonds.
The investment bank upgraded the asset class to overweight on a short-term basis of three months; over the coming 12 months, on the other hand, it neither recommends buying nor selling the asset.
The higher view toward cash is a move to reduce risk, wrote Christian Mueller-Glissmann, an equity strategist at Goldman Sachs.
“Despite volatility settling from its highs year-to-date, conviction levels are low near-term as the growth/inflation mix has worsened and policy uncertainty remains elevated,” the note read. “Bonds have been under pressure in the U.S., while equities remain stuck in a ‘fat and flat’ range.”
Goldman isn’t the first major Wall Street institution to take a more bullish view on cash, which is seen as offering little in the way of risk or rewards. In January, Morgan Stanley’s Wealth Management’s Global Investment Committee said it was “focusing more on cash as a critical asset class for 2018,” citing “this backdrop of an increasingly pricey U.S. equity market, and extremely rich credit market and rising global rates.” In 2017, Vanguard wrote that its outlook “for global stocks and bonds remains the most guarded it has been in ten years.”
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Both stocks and bonds have been struggling in 2018. The Dow Jones Industrial Average DJIA, +0.17% is down 8.8% from an all-time high hit in January, while the S&P 500 SPX, +0.35% is off by 7.2% from its own record. Both have been in their longest stretch in correction territory since the financial crisis.
Separately, the yield on the 10-year U.S. Treasury Note TMUBMUSD10Y, +0.54% has risen from 2.38% at the start of the year to 2.98% currently, and it broke above 3% last month for the first time in about four years. Yields, which move inversely to prices, are expected to continue rising as the Federal Reserve repeatedly boosts interest rates over the coming year. That is a dynamic that could result in investors dumping government bonds—pushing rates higher—in anticipation of richer coupons in the future.
Read: Jamie Dimon sees 4% bond yields ahead—but don’t panic
Goldman is bearish on fixed-income assets, giving bonds an underweight rating, the equivalent of a sell, and writing that they represent “less good hedges” against market declines in the current environment. The bank’s upgraded outlook on cash largely reflects short-term policy uncertainty, including on trade and the coming midterm elections; it retains an overweight rating on equities. “We still see bear market risk as low as growth levels are healthy and recession risk remains low,” it wrote, adding that “near-term return potential is somewhat limited.”
A greater cash allocation “should help lower portfolio risk,” wrote Mueller-Glissmann. The Goldman analyst said cash was “more attractive on a relative basis” than bonds.
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