By William Davis


Hard to believe, but it’s been nearly a decade since Lehman Brothers, at the time the fourth-largest investment bank in the U.S., filed for bankruptcy. You might recall that before the ink could dry on the paperwork, investment markets around the world had tanked, leading, ultimately, to the Financial Crisis of the late 2000s. That quarter – the fourth of 2008 – was the last three-month marker where both stocks and bonds lost money. Until, that is, our recently concluded first quarter of 2018. Cash, as it did 10 years ago, has once again ascended to the top of the heap.

“Money, it’s a gas. Grab that cash with both hands and make a stash.”

The big asset classes’ declines weren’t huge – the S&P dropped 1.2% and aggregate bonds were off around 1.9% – but both still underperformed cash, which did nothing except to not go down. Truth is, yield on cash and cash-like instruments, while reaching the highest level since October 2008, is still a number only slightly higher than zero. But the class’s discreet attractions, such as they are, have put it at the head of the list in portfolio construction.

“Money, get back. I’m all right Jack keep your hands off my stack.”

Of course, it’s easy to choke on the notion of allocating to an asset that’s made less than nothing across a nine-year bull run. But the unusual reality now is cash is turning out to be a safe asset in this market – and it’s not just because volatility has returned. It’s said that there are good reasons that both the short-term portfolio cushion provided by bonds and the longer-run gains from falling yields could be coming to an end. If they do, cash will become the A-number-one shield against falling stock prices.

 “Money, it’s a crime. Share it fairly but don’t take a slice of my pie.”

At least for a while. Fact is, history has not been kind to longer-term holders of cash. Since 2000, the jingly stuff has lost 0.5 percent of its value annually in real terms, compared to a 5.1 percent return from bonds. In practice, cash is, or should be, valued by investors for its optionality, meaning its worth isn’t in its trivial returns, but in the way in which it can be deployed. A goody-good pile of cash does indeed provide the firepower to buy back in after a sell-off…at least for those brave enough to buy when everyone else wants to sell. Somebody has to be king of the hill.

What the pundits have been saying…

“A downside risk is that everyone is hoping for the earnings to come through and that is really a main pillar for the bull case. And if earnings surprise to the downside then you have to say, what is the bull case hanging onto at this point?”

  • Keith Lerner, chief market strategist with SunTrust Advisory Services

What people have been saying…

“If we do get into a trade war, even a small one, it will hamper growth. And you can see that in the stock market, people don’t like it.”

  • Art Laffer, economist

What the numbers have been saying…

  • 37%

The portion of individual investors who expect stocks to fall over the next six months. Many are largely riding out the market’s turmoil — citing the belief that technology stars will be able to weather the industry’s latest controversies.


What the equity markets have been doing…

INDEX Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 23,932.76 +399.56 -(3.18)%
S&P 500 2,604.47 +16.21 -(2.59)%
NASDAQ 6,915.11 -(77.56) +0.17%
Russell 2000       1,515.33 +5.20 -(1.31)%


What the fixed income markets have been doing…

FIXED INCOME Period Change YTD 12 Months Yield
U.S. Treasuries
-(1.3)% +0.0% 2.8%
U.S. Investment Grade NC -(2.3)% +2.3% 3.8%
U.S. High Yield +0.2% -(0.6)% +3.8% 6.3%
U.S. Municipals NC -(1.1)% +2.3% 2.7%
Non-U.S. Developed -(0.1)% +3.2% +11.2% 0.8%




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