JPMorgan: Investors Shouldn’t Fall Into the Cash Trap

Investors are turning to cash as a safe haven due to market uncertainty. However, JPMorgan, the investment bank, warns that cash is a trap and emphasizes the importance of long-term thinking.

According to the information, David Kelly from JPMorgan advises investors, stating, “Cash is a trap.”

Investors are feeling trapped

According to Christine Idzelis’ report from MarketWatch, the prolonged market uncertainty may have made investors feel too comfortable with cash. However, JPMorgan suggests that as traditional stock and bond portfolios could potentially double in just over a decade, investors who sit on the sidelines while the markets recover are exposed to the risk of holding cash.

J.P. Morgan Asset Management’s Chief Global Market Strategist, David Kelly, stated during a recent media briefing in New York, “Cash is a trap. Having a long-term perspective is important.”

According to JPMorgan’s 2024 Long-Term Capital Market Assumptions report, a traditional portfolio consisting of 60% stocks and 40% bonds is estimated to provide an annual return of around 7% over the next 10-15 years. In the meantime, cash is attractive to investors as ultra-short-term Treasury bonds currently yield over 5% due to this year’s bond losses and recent declines in stocks.

Cash doesn’t rebound

Monica Issar, Global Head of Multi-Asset and Portfolio Solutions at J.P. Morgan Global Wealth Management, noted during the media briefing, “We understand that holding cash feels safe, but cash doesn’t rebound.”

Despite experiencing losses in the third quarter due to the stock market’s turbulence caused by the rapid rise in Treasury yields, U.S. stocks continue to rise this year. As of today, the S&P 500 Index has shown an approximately 13% increase in 2023, following a drop in August and September.

According to FactSet data, the iShares 20-Year Treasury Bond reported a 12.2% total loss in yield this year. Rising yields have impacted stocks and also pulled down long-term bonds.

10-year Treasury bond rates have reached their highest level since July 2007 at 4.846%, according to Dow Jones Market Data, and the 30-year Treasury bond yield has reached the highest level since August 2007 at around 4.951%.

Cash-like Treasury bills have performed relatively well. The iShares 0-3 Month Treasury Bond, benefiting from high returns on core assets following the Federal Reserve’s aggressive interest rate policy, has achieved a total return of about 4% this year. This trend began in early 2022, with FactSet data showing a 5.5% return for three-month Treasury bills.

‘Holding things you hate’

Kelly explains that diversifying assets as part of a long-term strategy sometimes means “holding things you hate.” He adds, “When it comes to stocks, they remain attractive compared to returns in other developed markets, even though U.S. margins are resilient. U.S. companies are facing competition, especially from Europe and Japan.”

JPMorgan suggests that the outlook for emerging market stocks is “moderating” due to increasing doubts about China’s prospects and investors’ reluctance to pay high valuations.

According to FactSet data, iShares MSCI shares that track international equities in developed and emerging markets, excluding the United States, have increased by 3.5% this year after an 18.2% drop last year.

In the U.S., the S&P 500 Index is recovering in 2023 after indicating its worst annual performance since the 2008 global financial crisis with a 19.4% drop last year. While the index has shown gains this year, it experienced a decline of over 2% last month.

A 60/40 portfolio remains a great starting point

According to JPMorgan’s report, both stocks and bonds have only been sold in three of the last 50 years: 1969, when inflation doubled in two years; 1974, when inflation reached a record high of 12% due to the energy crisis; and 2022, marking the end of the longest uninterrupted period of inflation-fighting from 1982 to 2022.

J.P. Morgan Asset Management suggests that a 60/40 portfolio is still an excellent starting point for expanding into a wide range of opportunities beyond cash.