For Many Investors, Cash Is King Again

Weighing Risk and Return

Thanks to the Federal Reserve’s series of interest rate raises, 2022 was one of the worst years on record for the stock market. Investors are now nervous that this bear market will continue into 2023, or even progress into a recession, as the Fed shows no sign of slowing its rate hikes.

To compensate for the general uncertainty in the economy, investors are piling into “safer” investments. In particular, investors have poured more than $68 billion into cash funds — the most since the height of the pandemic.

Rising Rates

After keeping interest rates extraordinarily low — nearly 0% during the pandemic — the Fed reversed its stance, issuing a non-stop series of rate hikes for the better part of the past year. With inflation remaining stubbornly high, investors have good reason to believe that these rate hikes will continue throughout 2023 and beyond.

With all this in mind, investors are ditching assets that tend to underperform during periods of rising rates, such as equities and gold. Instead, they’re sticking with cold, hard cash.

4% Risk-Free

Many high-yield savings accounts are generating close to 4% in interest right now. Since inflation is hovering around 6%, this may not sound like much. But considering the general economic uncertainty and risk posed to equities, cash looks more attractive as a risk-free alternative.

If you prefer to remain in equities, experts recommend buying assets that correlate with solving major societal problems. Companies that address issues like infrastructure, inequality, and climate change could experience a boom in times of economic uncertainty, as the general tenor is to seek solutions. On the flipside, stocks reliant on consumer spending and demand may suffer.

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