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$42 Billion Fund Hoards Cash—3 Reasons Stock Market Crash Might Occur

Published September 28, 2020 2:38 PM
Joseph Young
Published September 28, 2020 2:38 PM
  • Jason Brady, who oversees $42 billion in assets as the CEO of Thornburg, says cash is becoming more compelling in the current environment.
  • The U.S. stock market has slumped over the past month due to a stimulus stalemate, weakening U.S. dollar, and declining investor confidence.
  • Brady said his fund is holding “more cash” despite the Federal Reserve’s warnings.

Thornburg Investment Management is accumulating cash amid the stock market stagnation. Despite the Federal Reserve’s aggressive efforts to revive the market’s appetite , three factors raise the probability of another downtrend.

The three potential catalysts are funds increasingly holding onto cash, high stock market outflows, and overall market uncertainty.

stock market
The three-month performance of the Dow Jones Industrial Average. | Source: Yahoo Finance 

Fund CEO Says the Time to Own Cash Is Ripe

According to Jason Brady, the CEO of Thornburg, the perception of cash is negative due to the lack of yield. 

The Fed’s average inflation policy has further amplified the pessimistic sentiment around cash. Low interest rates make hoarding cash uncompelling for most investors.

But Brady, who oversees $42.661 billion in assets , says the time is right to hold onto cash.

Ahead of the presidential election in November, the U.S. stock market’s momentum has noticeably weakened.

Fewer institutional and retail investors are ambitiously betting on a stock market uptrend in the near term. The confluence of lacking stimulus , lagging economic activity, and election uncertainty has caused market sentiment to decline.

dollar index
The year-to-date performance of the U.S. Dollar Index. | Source: Yahoo Finance 

While Brady acknowledges the lack of appetite for cash, he emphasized that cash is critical in this environment:

Cash is very much maligned in the context of providing yield. It costs money to hold cash. I understand people’s reluctance. [The Fed] makes cash earn zero, is so that people don’t own it.

But there are significant uncertainties and risks in the near term that makes holding cash more compelling:

We are holding more cash, even though the Fed is telling us not to… You can turn cash into anything. But you can’t turn anything into cash.

Outflows from Stocks Are Increasing

On September 25, Bank of America reported that U.S. equity mutual funds and exchange-traded funds (ETFs) recorded mass outflows. 

In a single week, investors withdrew $26.87 billion worth of capital from stock funds and ETFs. It marked the most significant weekly outflow since the “Christmas Massacre” in 2018.

Large stock-market outflows  indicate that overall market sentiment is declining. Mutual funds tailor to many retail investors who invest through cost-average investment strategies.

The massive outflow of capital from mutual funds is a worrying sign that investors are turning cautious.

Market Uncertainty is Intensifying

Atop the growing demand for safer assets and cautious market sentiment, uncertainties are continuously growing.

U.S. Treasury yields have increased  in recent days, as investors observe the resurgence of COVID-19 in the U.S.

The stimulus stalemate has also been a persistent threat to the U.S. stock market in recent months. Although House Speaker Nancy Pelosi said a last-minute stimulus package could happen, the stock market reaction highlights investors’ doubts.

There are hopes that the Democrats and Republicans would agree on a smaller stimulus bill before the election. If that occurs, the dollar will strengthen as checks are mailed out to Americans.

Some strategists expect the U.S. dollar to strengthen in the coming months. Watch the video below:

Apart from a multi-trillion dollar stimulus package, there are no significant catalysts for stocks in the near term.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com.