The US stock market faces competition from traditional savings accounts, according to Wall Street analyst Jim Bianco.
“Cash is no longer trash. That was a two-decade old meme that doesn’t apply,” the Bianco Research president said.
He said higher interest rates are likely to suck money out of stock markets, making equities a less attractive investment.
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Cash is looking increasingly attractive as an investment option as the Federal Reserve jacks up interest rates further, according to Wall Street analyst Jim Bianco.
“Cash is no longer trash. That was a two-decade old meme that doesn’t apply,” the Bianco Research president said in a CNBC interview on Wednesday.
“Cash could actually be somewhat of an alternative where it was just a waste of time throughout the 2010s. It’s no longer that anymore,” he added.
Bianco thinks the Fed will hike interest rates to 6% by fall to combat stubbornly high inflation, which came in at 6.4% in January. The US central bank lifted the fed funds rate from almost zero to nearly 5% within the past year, and has signaled more increases.
The minutes of the Fed’s latest policy meeting, released Wednesday, showed that some officials were in favor of a bigger, 50-basis-point rate hike this month, rather than the 25-basis-point move that was announced on February 1.
“A lot of people are starting to think… the Fed just is not going to go one extra rate hike, but they’re going to go many extra rate hikes,” Bianco said. “That’s why I think you’re starting to see the stock market wake up to it,” he added.
The S&P 500 index of US shares has retreated almost 5% from a five-month high reached at the start of February, with the market seeing an increase in volatility. The weakness in equities adds to the appeal of cash as an investment option, as higher interest rates offer investors a way to generate income with reduced risk.
Rising rates encourage saving over spending as they boost returns from bank accounts. But that can also lead to a slump in demand, slowing the economy and dragging down stocks and other assets.
“You are going to get two-thirds of the long-term appreciation of the stock market with no risk at all,” Bianco said. “That is going to provide heavy competition for the stock market. That could suck money away from the stock market,” he added.