High-Yielding Cash Is Pummeling Stocks

What You Need to Know

The stock market is buckling under the weight of a simple equation: cash earns more than equities.
Currently, six-month Treasury bills yield about 5.5% — the highest since 2001.
The S&P 500 is down 5% so far in September, putting it on track for its worst monthly performance this year.

The stock market is buckling under the weight of a simple equation: cash earns more than equities.

Currently, six-month Treasury bills yield about 5.5% — the highest since 2001 — compared to the S&P 500’s earnings yield of roughly 4.7%. That’s the biggest advantage that cash has enjoyed relative to equities since 2000, according to data compiled by Bloomberg.

While not quite an apples-to-apples comparison, it speaks to one of this year’s most urgent questions for money managers: do you hold your nose and dive into still-expensive equities, or hide out in cash and risk missing out on any rebound?

With the Federal Reserve’s resolve of keeping interest rates elevated for longer firmly cemented in the market psyche, investors are increasingly opting for the latter.

They’re flocking to short-dated Treasury bills, which offer virtually zero credit risk.

Assets in money market funds hit an all-time high of $5.6 trillion this month, while about $17 billion has flooded into cash-like exchange-traded funds over the past three months as investors search for lofty yields, according to data compiled by Todd Sohn, ETF and technical strategist at Strategas Securities.

The vanishing appeal of stocks for income-hungry investors was on display yet again on Tuesday as bond yields continued to rise after briefly falling from decade-highs.

The 10-year yield touched 4.56% at one point, its highest level since 2007. Meanwhile, the S&P 500 and the Nasdaq 100 fell more than 1% each.

“Stocks are more expensive than cash,” Ed Clissold, chief U.S. strategist at Ned Davis Research, said on Bloomberg Television’s The Close. “You really have to try to find companies that will grow quickly to justify owning a risky asset like stocks instead of just sitting in cash and collecting a risk-free 5.5%.”

Treasury Bills Vs. S&P 500 Earnings Yield | Cash earns more than the S&P 500

While still sitting on double-digit year-to-date gains, that logic has dragged the S&P 500 5% lower so far in September, putting the index on track for its worst monthly performance of 2023.

Bears on a Roll

While higher rates are boosting the allure of cash, they’re one of the biggest concerns plaguing stock bulls at the moment. Funding costs are growing increasingly expensive as inflation-adjusted yields hover near decade-highs, threatening to pressure companies big and small.

That’s feeding into concerns over tech shares, because their long-term earnings prospects now have to be discounted at higher rates.

Given that backdrop, hedge funds are ramping up their bets against stocks, driving net leverage to the lowest levels since the depths of the pandemic. Meanwhile, a Goldman basket of the most-shorted stocks is down more than 11% this month, handing bears a handsome profit.

With the labor market still strong and inflation above the Fed’s target, policymakers forecast fewer rate cuts than previously anticipated at last week’s policy meeting. That should keep cash yields appealing for the foreseeable future, said Winnie Cisar, global head of credit strategy at CreditSights Inc.

“So long as the Fed is at elevated rates, cash is king,” Cisar said. “If you fully believe what the Fed is saying/telegraphing in its SEP and statements, then cash is going to be the likely big winner.”