Weekly Wisdom- June 7, 2023

By Hightower Great Lakes on June 7, 2023

Yield Opportunities in Short-Term Securities

Since the end of last year, given the heightened economic uncertainty and restrictive monetary policy, there has been a discernible surge in the adoption of a strategy that involves keeping cash on the sidelines.

Money market funds have been an efficient vehicle for capturing the elevated short-term yield environment. Investors use money market funds for temporarily parking assets. Money market funds contain investments in high quality, short-term debt securities.

Chart 1: Highest Short-Term Yields in More Than a Decade[1]

Given the inverted yield curve, short-term yields are higher than longer-term yields. Restrictive Fed policy has created higher rates across the curve, but the bond market is pricing in rate cuts over the longer term – hence, the curve inversion. So far, the Fed has communicated that policy rates will remain “higher for longer.”

It remains uncertain what rates will look like in the future, but it is known that investors can capture historically-elevated yields today.

Chart 2: Latest Fed Dot Plot Shows Median Projection for Rate Cuts in 2024 and Beyond[2]

Money Market Funds and Alternative Ways to Capture Yield Environment

Money market funds, bonds and certificates of deposit (CDs) provide a means to preserving capital and avoiding potential risks associated with volatile market conditions. Investors are taking notice; money market assets have risen to fresh all-time highs.

Crane 100 Money Fund Index yields 4.9% annualized, and other cash management strategies can yield closer to 6%.[3] The annualized return for the S&P 500 since 2000 is 6.7%. The annualized return for the Dow Jones Industrial Average is 4.7%. This puts into perspective the generational opportunity – keep in mind that equity returns compound over time, whereas short-term securities mature, and we do not expect short-term yields to stay this elevated forever.

Chart 3: Popularity in Money Market as Vehicle for Parking Cash[4]

Cash is, once again, part of the investment allocation strategy. Other cash strategies include buying treasury bills and other short-term bonds directly. We consider these cash-like investments because of the short-term maturities, high quality and liquidity. Investors are being “paid to wait” to make allocation decisions.

Time in the Market

Given the positive GDP growth, healthy labor market, slowing inflation and strong tailwinds across themes like nearshoring, restocking and AI, we maintain a positive market outlook and anticipate a greater chance for softer landing. The Atlanta Fed’s GDP Now forecast model projects +2% q/q GDP in Q2.

Industrial production increased +0.5% m/m in April, surpassing expectations of 0% growth. Consumer spending in April rose by +0.8% m/m, doubling expectations of 0.4%. Consumer spending on services is 9% above its pre-pandemic trend, and consumer sentiment is rising.

The ISM Services Survey reported broad strength across new orders, business activity and inventory sentiment. April new home sales were the highest in April since March ’22. We are also getting greater clarity with the debt ceiling behind us, an upcoming Fed meeting and China stimulus rumors.

This should all lead to a broadening of positive sector/stock performance in the markets. As of last week, seven technology stocks accounted for 100% of the S&P 500’s positive 2023 performance. 78% of S&P 500 earnings in Q1 beat expectations. Analyst revisions for Q2 during the first two months were better than historical averages.[5] Broadening market expectations should provide optimism for investors, both in equity markets and other asset classes. There used to be no alternative to equities… that has changed.

Compounding equity returns over time is extremely powerful in accumulating wealth. We are staying invested. Diversifying with other asset classes, like credit and real estate, offers an important ballast towards overall allocation and can improve risk-return. You can leverage money market funds, or equivalent cash yield strategy, as part of your fixed income allocation.

Part of our investment strategy is to take what the market is offering by staying nimble and adapting to the current environment. Today, the market is offering elevated short-term yields. We think it is a great way to generate safe yield while you wait to allocate more broadly.

Click here to read last week’s Weekly Wisdom (5/31).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of June 6, 2023.

[2] Source: The Federal Reserve (chart). As of March 22, 2023.

[3] Source: Crane Data. As of June 6, 2023.

[4] Source: Forbes (chart). As of June 6, 2023.

[5] Source: FactSet. As of June 1, 2023.