Market volatility has picked up significantly recently, so it doesn’t surprise that safety is in demand. Here at CFS, we’re starting to get questions about retreating to cash. But while that may feel super safe, there is a lot of risk involved with that line of thinking from a long-term perspective.
Also, value is critical. I don’t mean “value” like the profile of a company’s stock. I mean knowing the value of the asset you own (not just the price). I bring that up because there is tremendous value in owning a great stock at a depressed price, and there are plenty of great companies being dragged down now with the overall market.
This phenomenon is apparent at a macro level. Look at the dramatic drop below in MAPsignals’ trusty Big Money Index (BMI), which tracks “big money” investor activity. Big selling and hardly any buying made the BMI drop to 44.2% recently from more than 70% not long ago:
This downward pressure could continue over the next couple weeks. Just last week we saw 680 “big money” sell signals and just 54 buy signals:
And if you dig into the sectors, as you can see in MAPsignals’ sector rankings chart below, there is large selling almost across the board:
This is why people are asking about retreating to cash. After all, “cash is king.”
But is it? Not always.
Using myself as an example, let’s go back to 2005, when I received my first paycheck coming out of college. If I had set aside my retirement contribution in cash rather than in the market, inflation’s dark magic would’ve made the buying power of those dollars significantly less today.
On a side note, when you’re a long-term investor like at CFS, even in fearful times like now, it’s important to recognize when stocks have reached unbelievably cheap levels. Ironically, many “safe” stocks have become quite expensive, meaning they’re not so “safe” as many believe. In other words, you need to recognize when the world flips on its head.
To show what I mean, let’s look at the Invesco QQQ Trust (QQQ), a common proxy for the tech-heavy NASDAQ market. As of the April 26, 2022, close, it’s down 21% on the year. But going back to my 2005 retirement savings example, QQQ is up 282% since then, even with all the near-term pitfalls.
Comparatively, if my savings were in cash, the real value would be about half as much as my total contribution. That’s because today it takes $1.47 to buy something that cost $1.00 in 2005. In other words, the “safety” of cash produced a real return of -47.2% since 2005.
So, while fear is driving many of the questions we are getting today, keep in mind everything that’s occurred since 2005, the beginning of my example. We’ve been through a global financial crisis, government credit downgrades, war, disease, stock market crashes, economic slowdowns, interest rate fights, and more.
Our friends at MAPsignals did a great job of showing how markets tend to react when there’s always something to fear (i.e., they survive):
For long-term investors, one of the biggest fears should be holding cash and waiting it out. As I just highlighted, a cash-centric investing strategy since 2005 would’ve caused you to lose nearly half your value. We want to hold value, not lose it!
This philosophy is what’s starting to move our focus to beaten up “growth” stocks, like technology companies. There is lots of value in holding great tech companies. And when you look at our world today, do you think we’ll be any less reliant on tech tomorrow?
Are you planning on using a phone book? Giving up streaming? Dusting off that typewriter? What about the fax machine? Are you foregoing new devices in favor older, slower ones? And what about networking and cybersecurity? Those areas are advancing at electric paces because humanity needs them to do just that.
In other words, tech is going nowhere; it will only get more ubiquitous.
Some tech stocks have fallen 50-80% from recent highs. That’s scary. But even scarier is the guarantee that cash will perform worse over time going forward.
With so many companies getting killed right now, even the best ones are caught in the mess. For the opportunistic long-term investor, that’s a good thing. Tech stocks with superior fundamentals and the support of “big money” are on sale. So, the hunt for value is on.
Growth stocks are being punished. But we believe the best ones will rise again. And we’re looking for the profitable companies with growing sales and earnings. We want solid balance sheets. This is where we’ll plant our seeds.
In contrast, “value” stocks are starting to reach unsustainable levels. One example is the Clorox Company (CLX). Somehow it is trading at a current price-earnings (P/E) ratio of 74x, with a forward P/E of 36.5x. For perspective, the long-term average P/E for the S&P 500 is around 16x. By that measure, Clorox is hugely expensive. Right now, it’s not the textbook definition of a “value” stock.
Basically, the world is flipped on its head – growth is the new value. This won’t last forever. We see this as an opportunity to carefully target growth while it’s a big value. That kind of strategy is a safer long-term play than retreating to cash. Cash is guaranteed to decrease in real value while history suggests American businesses will rise.
When to Start?
It’s appropriate to wonder when investing in growth is the prudent move again. At CFS, we look to data as a guide.
One major datapoint we’ll eye is the two-year Treasury yield because it’s a fantastic real-time market proxy for where the Federal Funds Rate is heading. As we've seen, the two-year yield has surged and put significant pressure on growth stocks:
From a historical basis, growth stocks are unlikely to bottom out until the two-year yield starts to trend lower. Falling yields are bullish because they signal that the Federal Reserve won't tighten more than what's already priced in.
So, let me highlight our playbook. Until the two-year yield begins to fall, we’ll continue to:
- Stick with high-yielding stocks in favored sectors
- Stay in inflation-fighting commodity, energy, and materials stocks and sectors
- Be ready to rebalance into cheap, blue chip growth stocks in the tech, discretionary, and communications sectors when the data indicates it’s appropriate
Yes, fear is high. Cash may seem desirable, but it’s not the long-term answer. The definition of “value” is changing. Given all this, it’s wise to have the data on your side and be ready to act in your own long-term best interests.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.