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Portfolio Construction Insights
Is Now the Time to Redeploy Cash?
November 30 2023Analyzing historical performance around recent federal funds interest rate cycle peaks could help investors decide when to move cash off the sidelines.
Key Insights
- Market uncertainty and short-term interest rates above 5% have contributed to record assets in money market funds. With all this cash on the sidelines, many investors want to know when to redeploy cash back into the market.
- Our analysis compared the historical impact of investing various asset classes and a balanced 60/40 portfolio of stocks/bonds versus cash at multiple starting points before, at, and after the fed funds interest rate cycle peak.
- Based on history, investing in a diversified 60/40 slightly before or at the fed funds peak may be optimal, while investing after the peak still outperformed cash.
- Fixed income also outperformed in all periods except one year before the fed funds peak starting point. Equity results were not as clear-cut as fixed income, but investing at the peak generated significantly better returns than cash and bonds.
There’s a record amount of cash waiting to be redeployed.
Ongoing market uncertainty combined with short-term interest rates above 5% have resulted in a record amount of assets moving into money market funds. According to Morningstar, investors held approximately $5.6 trillion in money market accounts as of August 31, 2023, representing an increase of over $1 trillion over the prior 12 months. Based on our client conversations, we have seen a significant rise in cash and cash proxies held in financial models. We are also seeing cash held outside the models, waiting to be redeployed into the market.
Interest rate peaks could be the key to timing cash reinvestment.
As shown in Figure 1, the federal funds interest rate and the 10-year U.S. Treasury yield historically tended to peak together. However, our research suggests that investors don’t need to wait for the peak to redeploy cash.
The T. Rowe Price Portfolio Construction team analyzed similar historical periods that could help investment professionals make informed decisions on when to redeploy cash back into the markets. Our analysis focused on the average 12-month returns of the past four fed funds interest rate peaks and looked at the impact of investing at various starting points prior to, at, and after the cycle peak.
Fed funds interest rates and Treasury yields tended to peak together.
(Fig. 1) Fed Funds Rate and 10-Year U.S. Treasury Yield: December 31, 1993, Through September 30, 2023
Source: Haver Analytics/Federal Reserve Board. T. Rowe Price analysis using data from FactSet Research Systems, Inc.
For the peak interest rate dates, we used February 1995, May 2000, June 2006, and December 2018. We used the 90-day T-bill to proxy cash and cash equivalents in our study, and we compared these returns to a typical moderate-risk portfolio composed of 60% stocks (S&P 500 Index) and 40% bonds (Bloomberg U.S. Aggregate Bond Index), as well as a selection of common fixed income and equity benchmarks.
A 60/40 portfolio outperformed in all periods except one year before the fed funds peak.
(Fig. 2) Average One-Year Total Return of 60/40 Portfolio Over Prior Four Fed Rate Hike Cycles
| One-Year Total Return (%) | ||
| U.S. T-bill 90 Day | 60% S&P 500/ 40% Bloomberg U.S. Agg. (USD) | |
| 1 Year Before | 4.0 | 3.6 |
| 6 Months Before | 4.6 | 9.8 |
| 3 Months Before | 4.6 | 11.5 |
| Peak | 4.4 | 15.5 |
| 3 Months After | 4.1 | 5.1 |
| 6 Months After | 3.6 | 6.0 |
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Standard & Poor’s, Bloomberg.
As shown in Figure 2, a balanced 60/40 portfolio underperformed the cash proxy when invested one year prior to the fed funds peak The stock component performed relatively well during this period, but the bond component lagged as interest rates were still rising. The balanced portfolio outperformed the U.S. 90-Day Treasury bill cash proxy at all other starting points. The outperformance was greatest when invested at the peak, followed by the three- and six-month pre-peak starting points, respectively. Outperformance was smaller after the peak.
Fixed income also outperformed in all periods except one year before the fed funds peak.
(Fig. 3) Average One-Year Fixed Income Total Return Over Prior Four Fed Rate Hike Cycles
| One-Year Total Return (%) | ||||
| U.S. T-bill 90 Day | Bloomberg U.S. Agg. | BofA U.S. High Yield | Bloomberg Global Aggregate | |
| 1 Year Before | 4.0 | 0.8 | 0.4 | 1.3 |
| 6 Months Before | 4.6 | 8.1 | 7.0 | 8.0 |
| 3 Months Before | 4.6 | 12.0 | 10.1 | 11.3 |
| Peak | 4.4 | 10.1 | 11.8 | 9.3 |
| 3 Months After | 4.1 | 7.7 | 2.6 | 7.2 |
| 6 Months After | 3.6 | 7.7 | 4.6 | 7.0 |
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Bloomberg, Bank of America.
As shown in Figure 3, the pattern among fixed income portfolios is clear: Redeploying cash three and six months prior to the peak, at the peak, and after the peak significantly outperformed the cash proxy. Investing too early—one year prior to the peak—was less than optimal as the cash proxy outperformed. The best outcome occurred when deploying cash six or three months before the peak as longer-duration fixed income significantly outperformed cash as the peak approached. A global fixed income portfolio followed a similar path as U.S. fixed income, while the performance of high yield was mixed.
Equity investments generally outperformed when invested at the fed funds peak.
(Fig. 4) Average One-Year Equity Total Returns Over Prior Four Fed Rate Hike Cycles
| One-Year Total Return (%) | ||||||
| U.S. T-bill 90 Day | S&P 500 TR | Russell 1000 Growth TR | Russell 1000 Value TR | Russell 2000 TR | MSCI EAFE NR | |
| 1 Year Before | 4.0 | 5.5 | 9.6 | 1.7 | 2.9 | 6.4 |
| 6 Months Before | 4.6 | 10.9 | 8.4 | 13.1 | 8.8 | 4.6 |
| 3 Months Before | 4.6 | 11.2 | 4.6 | 18.5 | 2.2 | 2.2 |
| Peak | 4.4 | 19.1 | 15.3 | 22.6 | 19.6 | 12.2 |
| 3 Months After | 4.1 | 3.4 | 1.9 | 5.6 | 3.2 | -0.8 |
| 6 Months After | 3.6 | 4.9 | 7.7 | 1.3 | 1.9 | -1.3 |
Past performance is not a reliable indicator of future performance. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Morningstar, Standard & Poor’s, Russell.
As shown in Figure 4, equity performance was not as clear-cut as fixed income, but there are some important observations. Investing in equities prior to the peak generally outperformed cash, while investing after was less beneficial. The S&P 500 Index and Russell 1000 Growth Index outperformed in all time periods except the period starting three months after the peak. The Russell 1000 Value Index significantly outperformed from six months before to three months after the peak. The performance of small-caps and international equities was mixed.
What does it mean for financial professionals?
There are several compelling reasons to allocate a portion of client money in cash-equivalent investments, including enhanced liquidity, low volatility, and the current high interest rates. However, there are also reasons to consider redeploying excess cash as we may be nearing a point at which opportunity costs begin to favor stocks and bonds.
Past performance is not indicative of future returns. Based on the analysis above, however, investors could consider reinvesting cash assets if you believe we are at or close to a peak in the fed funds rate:
- Consider moving excess cash into a diversified financial model, such as a balanced 60/40 portfolio of stocks and bonds, respectively.
- Risk-averse investors could consider focusing on deploying cash to fixed income allocations and waiting to reinvest cash into equity allocations.
If you or your client are not ready to make a move today, consider developing a game plan for deploying excess cash. For example, determine specific actions that you’ll take once certain milestones are reached, such as a pause in the Fed’s rate cycle or a specific time frame before or after the anticipated rate peak.
Portfolio Construction Solutions from T. Rowe Price can help.
If you’re preparing to redeploy cash into the market, we can help. Supported by the multi-asset experience and global resources of T. Rowe Price, our integrated suite of Portfolio Construction Solutions is designed to address your portfolio construction needs and help position your practice for success.
We work with financial professionals to find practical solutions for critical investment and practice challenges. Used independently or in combination, each component of our integrated suite of Portfolio Construction Solutions provides access to T. Rowe Price’s world-class multi-asset expertise and global investment resources to address your portfolio construction needs.
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Important Information
Risks: All investments are subject to market risk, including the possible loss of principal. Fixed income securities are subject to credit risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall. Diversification cannot assure a profit or protect against loss in a declining market.
Past performance cannot guarantee future results. All charts and tables are shown for illustrative purposes only.
The views contained herein are those of authors as of November 2023 and are subject to change without notice; these views may differ from those of other
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