It’s Time to Rethink Love for Cash With Fed Most Likely ‘Done’

Vildana Hajric and Peyton Forte    Sat, May 20, 2023

Bloomberg  -- Wall Street investors sitting on a pile of cash could start considering other opportunities, with the Federal Reserve possibly heading for a pause in interest-rate hikes, according to Tom Kennedy, chief investment strategist for global wealth management at J.P. Morgan.

“Cash very rarely outperforms, and it takes a long time for rates to go up, but they can come down really fast,” Kennedy said on the What Goes Up Podcast. He also estimated that his company’s clients are the most overweight cash now than they’ve been in a decade.

Here are some highlights of the conversation, which have been condensed and edited for clarity.

Q: What do you expect from the Fed going forward?

A: The Fed has been on a five-step journey to bring inflation down toward trend. The first step is to tighten financial conditions. The primary tool to do that is to hike rates. And for all of us regular people, that should change your decision.

Step two is those rate hikes impact the most interest-rate-sensitive sectors of the world. When interest rates go up, housing is the part of the economy that tends to respond first. Home-sale prices in America are going down sequentially — not a lot. Home prices went up a lot, they’re coming down a little bit. But it’s evidence now that rates are high enough and people need to change their decisions.

It’s a very short cycle and we have seen the impact there. So step one is raise rates. The Fed did that — 500 basis points. Step two is the most interest-rate-sensitive sectors respond — we’re there. Step three is now those high rates have to impact corporations.

How do rates do that? Higher rates actually limit the ability to borrow money and do capital investment. J.P. Morgan does billions of dollars of capital investment every year. If rates are too high, we can’t borrow and can’t do the capital investment.

If that’s true, we’re taking money or revenue from another business and so on. We’re in that phase. And when revenues in the system start to slow, as we’ve seen in in the S&P 500 as an example — in Q1 revenues relative to year ago are down 4%, give or take.

What do businesses do? They tend to defend their earnings and they can either cut capex more or more likely end up having to do some sort of layoffs — and then finally inflation comes down. So a five step process, I think we’re about halfway there. We should expect to see some level of layoffs in the back half of this year.

Q: You say that your clients are the most overweight cash they’ve been in the last 10 years. I’m wondering — for somebody who is in cash right now, what are you recommending that they actually be doing?

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