Ned Davis Snubs Cash Investing, Lauds Stocks and Gold

Not long ago, the saying was: “Cash is trash,” because money market funds and other cash-centric investments paid near zero. In March 2022, though, the Federal Reserve began raising short-term rates, and now numerous cash vehicles pay more than 5%. But with the Fed’s announced intention to pare rates—its policymaking committee expects three quarter-point cuts this year—the recent excitement over cash has dulled.

Ned Davis Research, in its just-released April overview, changed its recommended asset allocation to nothing for cash, down from 9% in March. The cash segment went to stocks, for a 70% allocation from 61% previously. Bonds remain at 30%, even though their prices could rally if the Fed does enact reductions in the fed funds rate.

At the same time, the firm strengthened its bullish outlook for gold. While Davis does not include gold or any other commodity in its allocation suggestions, it argued that bullion will continue to rise, meriting an overweight designation, along with stocks.

In the overview, Tim Hayes, Davis’ chief global investment strategist, advised investors to look for continued “gold and equity uptrends,” with both asset classes outpacing others in 2024. As of last Friday, gold was up 12.9% for the year and the S&P 500 had advanced 9.1%. For bonds, the Bloomberg U.S. Aggregate had lost 1.8%, most likely reflecting anxieties over a possible delay in Fed rate cuts.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Hayes wrote that nowadays “equities and gold warrant heavy exposure. Bonds and cash do not.”

Things were a lot different two years ago, when the Fed commenced its tightening regimen, aimed at curbing burgeoning inflation. “For the first time since 2013 we had upgraded cash to overweight,” Hayes recalled in his April overview. Also in 2022, it underweighted stocks. In 2022, stocks, bonds and gold all lost value. Gold typically suffers when rates rise, as interest-bearing assets, such as bonds, appear relatively more attractive. Gold, of course, pays no interest or dividends.

Then in 2023, inflation’s rise abated, thus stocks and gold did well, and bonds nudged up slightly, into the black. “By April 2023, gold became the first asset to post a bigger one-year return than cash, and stocks followed later in the year,” Hayes wrote. The trend improved further in 2024. Lately, gold has seen a “golden cross,” where its 50-day moving price average surpassed its 200-day average, a bullish signal to quants, as it shows recent price gains have accelerated.

What could spoil Hayes’ rosy scenario for his overweighted stocks and gold? He indicated a possible continued rise in the benchmark 10-year Treasury’s yield, which as of Friday was around 4.4%, up from 3.8% at the start of the year. One much-discussed reason for that: fears that inflation’s ebbing might have stalled out. The Consumer Price Index for March, to be released Wednesday, could boost the “inflation stickiness” narrative.

Another potential problem for stocks and gold is that speculators could push those assets’ prices too high, resulting in a painful correction. But Hayes pointedly added that he sees no evidence of such frothiness.