Is the flight to cash the right move now? – Expert Investment Views: Invesco Blog

What if I
told you on Christmas Eve 2018 that over the next 15-plus months, ending April
10, 2020, the US equity market, as represented by the S&P 500 Index, would
be up 18%?¹ If you’re like me, then you likely would have rejoiced,
especially following a year like 2018, in which the uncertainty of US trade
policy and tighter US monetary policy led to a rare negative-return year in the
broad market.² However, I would have been hard pressed to imagine,
in that scenario, money market assets having increased by 50% over that period to
$4.5 trillion.³

I understand
that this has played out differently than we expected, the 18% gain in US
equities notwithstanding. The uncertainty of the coronavirus outbreak persists.
Perhaps the new baseline assumptions that aggressive monetary and fiscal
support can bridge us through this period while we await new COVID-19 treatment
and rapid testing are too optimistic. Perhaps more equity volatility and
another drawdown are on the horizon.

Still, $1.5
trillion in new money market assets is unsettling. For perspective, that’s
enough money to buy everyone in San Francisco an apartment, and still have
$500,000,000,000 left over.⁴ That’s enough to pay a year’s salary
for 30 million teachers.⁵ I digress. The flow of dollars into cash
equivalents will likely prove reflective, once again, of investors making imperfect
decisions at inopportune times. I’ll take some solace in it as a good
intermediate-term contrarian indicator for markets but lament that many
investors just missed the best week in the US equity market since 1974 and the
7 of the best 30 days since 1995.⁶ I’d be remiss if I didn’t once
again include the chart below detailing the ruinous impact of missing the
market’s best days.

Figure 1: Missing the best market days can be detrimental and they almost always happen during bear markets

The fear of
missing out is likely being overwhelmed by investors being conditioned for rallies
that provide some short-term relief and are then followed by markets re-testing
lower levels. Truth be told, a retest of the March 23, 2020 low would have
investors posting slightly negative returns since Christmas Eve 2018. A
retesting of lows isn’t a prediction, but a possibility, nonetheless. The
flight to cash, in that scenario, would likely persist. For example, during the
global financial crisis, money market assets, according to the Investment
Company Institute, ultimately doubled before peaking in the first quarter of
2019, not surprisingly in time for equities to begin a decade-long ascent.

Reflecting
on what you should have done in 2008 and 2009 may provide guidance for how
investors should be responding now. What if investors, instead of fleeing to
cash during the tumultuous times, instead invested more money following each of
the worst days in the market? Figure 2 below demonstrates the experiences of
two hypothetical investors. Both invested $100,000 in the market in 1995. One
investor never added to the portfolio. The other investor added $5,000 to the
portfolio after each of the 20 worst days in the market, 13 of which happened
in 2008 and 2009. Adding $5,000 to the portfolio, following each of the worst
20 days in the market, enabled the second investor to have $300,000 more
dollars by the end of 2019 than the investor who never added to the portfolio.⁷
There’s a Baron Rothschild quote that applies, but far too insensitive for the
times to publish.

Figure 2: Historically, adding to the portfolio after the worst days has been beneficial

The point is
that the next weeks will likely bring more uncertainty and persistent volatility
in markets. Our instincts will likely be to add to the $4.5 trillion already
sitting in money markets. History reminds us that being in the markets for the
best days, and even adding to portfolios following the worst days, has been the
better approach.

1  Source: Bloomberg and Standard & Poor’s,
as of 4/10/20

2  Source:
Bloomberg, as of 12/31/19

3  Source:
Investment Company Institute, as of 4/10/20

4  Source: US
Census Bureau, Realtor.com, as of 4/10/20

5  Source: Bureau
of Labor Statistics, as of 12/31/19

6  Source:
Bloomberg and Standard & Poor’s, as of 4/10/20.  As represented by the S&P 500 Index

7  Source:
Bloomberg and Standard & Poor’s, as of 4/10/20. As represented by the
S&P 500 Index

Important Information

Blog header image: Helen Sotiriadis /
Stocksy

The
opinions referenced above are those of the author as of April 15, 2020. These
comments should not be construed as recommendations, but as an illustration of
broader themes. Forward-looking statements are not guarantees of future
results. They involve risks, uncertainties and assumptions; there can be no
assurance that actual results will not differ materially from expectations.

This
does not constitute a recommendation of any investment strategy or product for
a particular investor. Investors should consult a financial advisor/financial
consultant before making any investment decisions. Invesco does not provide tax
advice. The tax information contained herein is general and is not exhaustive
by nature. Federal and state tax laws are complex and constantly changing.
Investors should always consult their own legal or tax professional for
information concerning their individual situation. The opinions expressed are
those of the author, are based on current market conditions and are subject to
change without notice. These opinions may differ from those of other Invesco
investment professionals.