In response to the Federal Reserve's anti-inflation measures initiated in 2022, Bank of America (NYSE:BAC)'s private-client wealth has seen a significant shift with over $80 billion moving into short-term Treasury funds. This move has sparked an increase in yields on short-term Treasury debt and elevated deposit yields. The one-month Treasury bill, now at around 5.3%—its highest level since 2007—has attracted investors due to its rate exceeding recent inflation rates. As a result, cash now constitutes approximately 13% of the average Bank of America private-client portfolio as of today.
The stock market, on the other hand, has been impacted negatively, with the S&P 500 still down by 13% from its record high in early 2022, prior to the Fed's interest rate hikes. Equity allocations among Bank of America clients have dropped to roughly 58% from a previous peak of 66%.
However, as cash interest continues to accumulate, investors are contemplating reinvesting these funds, potentially back into stocks considering the current monetary policy landscape. The shift into cash-like investments is already showing signs of slowing down, with net movement into short-term Treasury bill funds falling below $2 billion last week.
Looking forward, Evercore anticipates that the stock market could witness gains in the coming months due to a decelerating economy and growing expectations for potential Federal Reserve rate cuts within a year. Lower inflation and subsequent reduced interest rates generally bode well for the stock market. Defensive sectors such as communications services companies (e.g., AT&T (NYSE:T) and Verizon (NYSE:VZ)), healthcare, utilities, and consumer staples often perform well during these periods. Jacob Sonenshine suggests that this strategy could yield better returns than keeping money in banks.
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