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Cash Is King for Investors in 2023

As financial turbulence casts a shadow over the Federal Reserve‘s future course and dampens the economic outlook, the adage “cash is king” may prove to be a winning strategy for investors this year.

In the short term, cash presents a “compelling alternative to the S&P 500 index,” according to a note to clients from Bank of America Corp. strategists, led by Savita Subramanian, on Wednesday. 

The firm anticipates limited near-term growth for the US equity benchmark relative to its year-end target of 4,000 – approximately its current trading level – while cash offers returns of around 5%.

Markets have endured a tumultuous month marred by concerns over a potential crisis in the financial system. That follows the recent failure of some US regional lenders and the near-collapse of banking giant Credit Suisse Group AG before its government-brokered takeover by rival UBS Group AG.

Fears of contagion have prompted speculation that the recent rate hikes by the Fed and other central banks could mark the end of the current tightening cycle, followed by a pause. At the May policy meeting, traders expect a 50% chance of another quarter-point rate increase, while pricing in approximately 75 basis points of rate cuts by year-end.

As anxiety over the economic outlook escalates, global cash funds saw their largest weekly inflow since March 2020, according to data from EPFR Global cited by the bank last week.

While cash may be more appealing for short-term positioning, BofA forecasts a 7% total annual return for the S&P 500 over the next decade, based on the firm’s valuation modeling. 

“Valuations may not explain much in the near term, but they may be all that matters over the long-term for the S&P 500, based on our work,” said Subramanian’s team.

In recent years, BofA also observed a significant shift in investors’ focus towards short-term considerations. As a result, zero-day-to-expiration options now constitute nearly half of the total options volume in the S&P 500, compared to less than 5% a decade ago.

Like cryptocurrencies, cash provides users financial freedom—a highly coveted commodity that is becoming increasingly scarce. 

As uncertainties persist in the financial sector, holding cash could be prudent for investors seeking stability and near-term returns.