Cash on the sidelines? Where to invest

Over $1 trillion has flowed into money market funds since the beginning of the year, marking a whopping 30% increase in total U.S. money market assets.¹ Highly liquid and low-risk allocations—such as cash—can make sense in a portfolio to meet spending needs. However, cash isn’t a great place to generate a return—especially now, as the U.S. Federal Reserve has cut interest rates to nearly 0%.

For investors who shifted to cash in order to tactically reduce risk amid the COVID-19 driven sell-off, now may be a time to consider redeploying capital. After the massive rally in U.S. stocks, from the recent low on March 23, investors have two options, in our view:

1. Allocate to parts of the market that have done well, such as U.S. growth stocks or Treasury bonds. 
2. Look for areas that have underperformed since the start of the year and are positioned for a recovery.

We’d embrace option two for several reasons: First, real-time economic indicators for May suggest we’ve already seen the worst set of economic data relating to the health crisis. This is evidenced by the improvement in Purchasing Managers’ Index (PMI) data. While the global growth picture no doubt remains challenged, with PMI figures still below 50 (a reading below 50 indicates contraction), the data appears to have bottomed in April.² As the global economy reaccelerates, this typically creates a bid for the most cyclical parts of the market; that is, those with the closest ties to the global economic cycle.  

Second, the most cyclical areas of the market have been beaten down in 2020, and a significant catch-up opportunity could materialize if market leadership broadens along with the appearance of better economic data. While a few areas like the U.S. technology and consumer discretionary sectors and large-cap growth stock markets are positive on a year-to-date basis, most parts of the market are down anywhere from 10% to 30%.³ This most notably includes smaller-sized companies, value stocks, and international equities. Crucially, these areas have started to display signs of life in the second quarter even as they’re digging their way out of the steep declines registered so far this year. This could suggest further catch-up potential compared with the areas that have already bounced back into positive territory.

The third element we’d consider is to rebalance portfolios: specifically between US growth and value equity allocations. For instance, an investor who aims to be evenly split between growth stocks and value stocks will find that those weights have likely changed based on their performance differentials. Rebalancing a growth overweight created from outperformance to still beaten down value stocks can help rebalance a portfolio. In addition, it can help position a portfolio to better participate in a potential value rotation over time.

In Market Intelligence, we’ve been slightly positive on U.S. value and U.S. mid-cap stocks within a global balanced portfolio. While these asset classes have underperformed in the first five months of the year, we’re starting to see them shift into gear. If market leadership continues to expand, we believe now may be the time to take advantage of these beaten-down areas.

1 Morningstar, as of April 2020. 2 Bloomberg, as of May 2020. 3 FactSet, as of 5/29/2020.