Podcast: Life after cash and investing at all time highs

A muddled inflation picture, uncertainty over if or when rates might be cut and markets at all time highs: what should investors do? Listen to the latest episode of the Investor Download to find out.



David Brett
Multi-media Editor
Robert Starkey
Portfolio Manager, Schroder Investment Solutions
Tara Jameson
Analyst, Multi-Asset Investments

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You can read a full transcription below:

[00:00:07.370] - David Brett

Welcome to the investor download the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett. We've been on a long and aggressive path of interest rate hikes for over a year now.

[00:00:28.970] - News Clip

Today, the FOMC raised our policy interest rate by 25 basis points. We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

[00:00:45.500] - David Brett

Higher interest rates meant it was more expensive to borrow money with the aim of slowing demand and taming inflation. And it seems to be working.

[00:00:54.930] - News Clip

All right. Switching gears now into the economy, and it looks as if inflation may be continuing to ease right here in the US.

[00:01:00.280] - News Clip

Yeah. According to the new data released by the US Bureau of Labour Statistics this morning. According to the report, prices of consumer goods rose two tenths of a percent in June, bringing the annual level down to 3%.

[00:01:13.420] - David Brett

In the US, inflation, which peaked around 9% in the second half of 2022, is now around 3%.

[00:01:20.810] - Tara Jameson

So ultimately, central banks just don't need to hold interest rates as high as they are anymore. And as inflation starts to fall, if you keep your policy rate the same, actually you're implementing a more restrictive policy because your real interest rates going up.

[00:01:35.600] - David Brett

That's Tara Jameson, a Fund Manager at Schroder's. The belief that interest rates will fall this year has made assets such as cash and bonds less attractive to investors and sent some stock markets to all time highs. But recent data has proved not everything in the economy runs so smoothly and sent jitters through markets.

[00:01:56.890] - News Clip

Over in the US, the consumer price index for January rose more than expected as high shelter prices weighed on consumers, marking a 3.1% increase. This data has jolted the stock market against bets that the Fed would start trimming rates in May.

[00:02:12.670] - Alex Funk

If history repeats itself, inflation does come a little bit in waves as well. And so I think the Fed is taking note of that. But they have the ability, because the US economy is still so strong, to play a little bit of a waiting game, right, to look for more confirmation on those data points.

[00:02:27.760] - David Brett

That's Alex Funk, Chief Investment Officer of Schroder Investment Solutions. Now there's a triple threat for investors. What to do if inflation remains sticky? How to react if central banks begin to cut rates? And should they fear investing in markets at all time highs? The answers to all of those are coming up later in the show. But in the first part, we'll look at why the battle to beat inflation isn't won yet.

[00:02:54.360] - Announcer

On Apple podcasts, Spotify, or wherever you get your podcasts, you're listening to the Investor Download.

[00:03:02.730] - David Brett

We had some inflation data out over the last couple of weeks from the US and the UK. It wasn't quite what was expected. Has that changed the game?

[00:03:08.810] - Tara Jameson

Well, the first thing I'd say is I don't think one data point amongst a bigger trend necessarily changes the game. It is obviously worth noting. And yeah, the inflation data recently was a bit of an upside surprise and sort of reinforced, I think, some of the concerns that we've had about inflation.

[00:03:27.450] - Alex Funk

We always said the journey from 9% to roughly 3%, that would be the easy part, right. Largely base effect, big movements out of some of the supply side factors. They move from 3% to the target of average inflation of 2%. That's not a straight journey. Right. And I think we're seeing that in the data. We're seeing it month on month, quarter on quarter. Disinflationary trends are clear. Right. So that's definitely happening. Getting to the official 2%, I don't think is a straight line.

[00:03:53.550] - David Brett

Even if we're on the right path, markets have been volatile after each release of data. Perhaps understandably, nervous investors have reacted to any signs that inflation might remain stubbornly higher. After all, it's been a while now since they were being told that inflation would be transient. It wasn't. And now they're being primed for higher, for longer, both in terms of interest rates and inflation, although not as high as previously.

[00:04:19.210] - Tara Jameson

We are going to see more volatility, and that is actually one of the things that kind of comes out of our work on the 3D reset. So the 3D reset is the big three structural forces that we think are going to create more inflationary pressure going forward. It's demographics, deglobalization and decarbonization.

[00:04:34.610] - David Brett

Ageing populations are creating labour shortages, which is pushing up wages. Reshoring or rerouting supply chains to bring security is costly. And cleaning up our energy supply and consumption is expensive in the short term.

[00:04:47.650] - Tara Jameson

The reset is creating inflationary pressure. Doesn't actually mean that inflation is necessarily going to be higher in the end, but within that there's going to be cycles. And the central banks do have a very difficult job on their hands at the moment. They've had to bring inflation down a long way. They've still got a bit more they need to do. And I think markets at the moment think that they can engineer a soft landing. But obviously these outcomes can be binary, and there is always the risk of a hard landing.

[00:05:15.240] - Alex Funk

You almost don't know the risk until it appears itself. Right. And so we saw a little bit of that with SVB (Silicon Valley Bank). We've seen a little bit more banking stress more recently as well. And the market is extremely reactive on inflation data, the expectations on the Fed, and we're seeing it in sort of sensitive areas. So again, in the bond market, we've almost become a little bit more accustomed to sort of ten basis point moves in the US treasury curve. Right. And that shows volatility.

[00:05:41.640] - David Brett

Despite the volatility, some markets are trading near all time highs. That isn't surprising if you believe inflation has been quashed. But it poses a difficult question for investors. If central banks begin cutting rates, should they be scared about investing in markets at all time highs? That's coming up.

[00:06:01.840] - Announcer

Get in touch with us by email at schroderspodcasts@schroders.com or visit our website, schroders.com/theinvestordownload.

[00:06:10.950] - David Brett

The investor download the US stock market hit an all time high in mid december 2023 and has moved higher since. At the end of January, it was nearly 3% above the previous peak, this has left many investors feeling nervous about the potential for a fall.

[00:06:29.470] - Tara Jameson

I think it can feel quite scary buying into markets when they're at all time highs. And I guess that's where kind of investor psychology comes in.

[00:06:36.270] - David Brett

The market is actually at an all time high more often than you might think. According to research from Schroders, of the 1176 months since January 1926, the market was at an all time high in 354 of them.

[00:06:52.400] - Tara Jameson

If you actually look at the data and you look at the times that the S and P has been at an all time high, it's been at an all time high 30% of the time. And actually, the investment outcomes haven't been bad if you bought at an all time high. So if we look back over history, you'd have beaten inflation by 10.3% investing at the all time highs compared to 8.6 over other periods. So it's not necessarily a bad thing.

[00:07:20.340] - David Brett

Over long time horizons, differences in returns can seriously add up. If you'd invested $100 into the US stock market in 1926 and just left it alone, didn't touch it, it would now be worth around $85,000, that's according to Schroder's data, which we'll link to in the show notes.

[00:07:39.110] - Alex Funk

Now, if we take the opposite view of that and said, well, if you put in that same hundred dollars and then took the money out the market when you had hit these all time highs and then invested in cash and ultimately tried to come back into the market, that same investment would have been roughly 90% lower at just under $9,000. So again, the effect of timing the market, again purely just on all time highs, creates some complexities for your investment performance as well.

[00:08:05.400] - David Brett

Adding to that complexity is the prospect of the Federal Reserve potentially cutting rates. For instance, the market is pricing in a nearly 82% chance of a quarter point cut by June. The situation can change. But what happens once the Fed starts to cut?

[00:08:22.530] - Alex Funk

What we saw is, on average, from the point that the Fed starts to cut, and this is us data, equities actually outperform by about 11% relative to inflation. So that's quite significant. And you can see that that's the euphoria being priced back into the market.

[00:08:38.580] - Tara Jameson

So not only have equities beaten inflation, they've actually also beaten cash by about 9% on average. What I would say, though, is we do need to be a little bit careful, because these are average numbers, and of course, the spread in those numbers is pretty large. But what we can take comfort from is actually in 16 of the 22 cutting cycles we're talking about here, we've actually had a recession as well, and still that average number is positive. So if the fed can engineer a soft landing with this cutting cycle, then actually equity markets stand to do fairly well.

[00:09:12.630] - David Brett

Is riding this inflation wave just about investing in equities, and in particular us equities or is there more life after cash? That's coming up.

[00:09:28.710] - David Brett

From Schroder's data, it looks almost like equities are the only game in town if you want to get inflation busting returns. Is that the way you see it?

[00:09:36.940] - Tara Jameson

Equities are a very good asset to hold long term if you want to beat inflation. They're one of the best at outrunning inflation. But that doesn't mean you want to be sort of fully juiced up on equities all the time. You definitely want to hold a diversified mix of different asset classes because they bring different things to the table. So one of the fortunate things about interest rates having risen to where they are today is that you can actually earn quite a good yield now on fixed income, and they can become a bit of a return generator in the portfolio, whereas previously they were more just there as a diversifier, because they didn't really pay you anything. But equally, in the last year, we've seen some very strong returns from corporate bonds, for example. So the additional spread that you earn for taking on corporate credit risk has really contracted a long way. So actually, at the moment, in terms of taking risk in portfolios, we are preferring equities to other parts of the market like corporate credit. But that can change. It just depends what the market's pricing.

[00:10:32.950] - David Brett

However, it seems hard to ignore equities.

[00:10:35.860] - Tara Jameson

But I think the really important thing to remember is that equities are critical to hold over the long term. If you want to beat inflation, they are one of the best assets.

[00:10:44.040] - Alex Funk

And I say within equities, you have to think about it a little bit as well. So clearly the magnificent seven are truly magnificent, right? Virtually no debt on the balance sheet, strong cash flow, high moats in terms of the products and services they have. Ongoing tailwinds from their investment in AI and the excitement around that. And that's done really well. One has to acknowledge that there's other parts of the market, other parts of the world that could either benefit from that as well when we have a broadening out and ultimately re rate from a perspective of being slightly depressed over the last little while. So I think not only across asset classes, but within asset classes, you need to think about that diversification element as well.

[00:11:21.370] - David Brett

One very final question, given the rates look like they're peaking and possibly on the way down, is cash dead now for investors?

[00:11:27.790] - Tara Jameson

I don't think cash is dead. It's always an option as an asset class. But I do think that fixed income is becoming more exciting. And the one big difference between government bonds and cash is that government bonds do have that potential to have that negative correlation with equities in a severe risk off situation. So we have had times in markets before where equities have been falling and your bonds have generated a positive return in the portfolio. Cash isn't going to do that for you. So they do bring different features and they bring something different to the table in a portfolio.

[00:12:00.550] - David Brett

That was the show. We very much hope you enjoyed it. You can subscribe to the investor download wherever you get your podcasts. And if you want to get in touch with us, it's schroderspodcast@schroders.com. And you can find out much, much more at schroders.com/insights. New shows drop every other Thursday at 05:00 p.m. UK time. In the meantime, keep safe and go well.

[00:12:25.050] - Announcer

The value of investments and the income from them may go down as well as up, and investors may get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer. Solicitation or recommendation of any funds, services or products or to adopt any investment strategy.


David Brett
Multi-media Editor
Robert Starkey
Portfolio Manager, Schroder Investment Solutions
Tara Jameson
Analyst, Multi-Asset Investments


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