Fed hikes give cash appeal; stocks no longer only game in town

NEW YORK: The US Federal Reserve’s anticipated interest rate hike this week will make cash the most attractive it has been in about a decade and end the era of stocks as the only game in town.
During this bull market which in August broke the record as the longest ever, interest rates were so low that most fixed income assets other than junk bonds yielded less than the inflation rate or the dividend yield on the S&P 500. This drove yield-hungry investors to stocks, the one asset that delivered a real rate of return, or return on investment adjusted for inflation.
The Fed ended its regime of rate suppression when it stopped expanding its balance sheet and then began raising interest rates in late 2015. Since then, bonds have slowly returned to delivering real returns relative to inflation.
With next week’s anticipated rate action, cash will join the party. A broad array of money market assets should finally regain a real return versus inflation. It will be the first time since early 2008 that money market assets will deliver a real return.
“It certainly gives cash a boost. It gives risk aversion a boost,” said Ablin.
As the real rate of return available on safer US assets rises, it diminishes the appeal of riskier assets.
“The regime of safe asset shortages is over. We are now in a safe asset glut regime,” Credit Suisse Group AG analyst Zoltan Pozsar, said in a recent note.
The stock market, meanwhile, is bracing for the rate hike at a time when the forward price-to-earnings(P/E) of 17.2 versus the historic average of 15. This was not a headwind three or five years ago when the competition yielded a negative real return, but that valuation now may look a bit pricey, especially with profit growth expected to moderate after this year’s extraordinary, tax-cut induced showing.
S&P 500 earnings growth should hit its peak for the cycle this year, estimated at 23.2 per cent, while growth for 2019 is now estimated at just 10.2 per cent. — Reuters