Many portfolio managers I speak to effectively sidestep the worst of the crunch last year up until early March. That doesn’t mean they weren’t down — they moved big time into cash. Even though, they’ve been pessimistic and shaved down their exposure to stocks, they kept much of that exposure and have seen portfolios benefit from the almost 50% we’ve had from the bottom.
Now it gets sticky — those large arsenals of cash are weighing heavily on returns. Markets have skyrocketed and defensive investors are faced with a conundrum — what to do?
Check out a solid article this morning coming from The Pragmatic Capitalist (TPC) entitled, “The Cash Conundrum“. TPC doesn’t buy the pithy saying that the humongous buildup of “cash on the sidelines” will influence future stock prices and cites the venerable John Hussman as saying that given the fact that the stock market is a secondary market, and not primary,
“Cash does not ever find a home in a secondary market. Every time you hear the phrase ‘investors are putting money into…’ or ‘investors are taking money out of…’ or ‘money is flowing out of … and into …, it is a signal that the speaker is unable to distinguish a secondary market from a primary one.”
Instead, it’s the psychology of this cash “that makes all the difference in the world”. Money managers who navigated the recent turndown relatively well and found some shelter in cash for their clients to wait out the financial storm, is now feeling pressure to reach for returns as they watch the daily gains in stock prices.
As a defensive mechanism, cash helped save asset managers’ and their clients’ skin. As the market has turned, though, TPC calls cash “as a long-term holding an incredible destructive asset to hold in ones [sic] portfolio.”
What to do? A recent JPMorgan strategy piece cited by TPC posits extremely succinctly:
Simply put, historic comparisons on yields have little relevance, as investors cannot buy assets at past prices. You can only buy what is available today. Hence, the relevant comparison of an asset’s value is not against its own history, which cannot be bought, but against other assets available for sale today. By that standard, both equities and bonds are cheap and attractive, in our view.
Are you chasing?
