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Managers Who Make This Move Are Betting on a Selloff -- But This Could Backfire

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One selloff indicator has been emerging of late: Managers are moving to cash.

But that doesn't mean investors should follow the move-to-cash strategy. 

Some wealth managers are increasingly moving their clients' money into cash, a bet that hinges on the expectation of a stock market selloff.

"We continue to be overweight cash due to higher interest rates, which make money market returns more appealing while reducing portfolio risk," wrote Kurt Spieler, chief investment officer of Wealth Management at First National Bank of Omaha in an emailed update. Treasuries are usually a good option for the risk-averse, but many on Wall Street see "limited" upside to price gains in treasuries, which have risen considerably in 2019. Spieler's bet is "in anticipation of continued volatility." He sees "risk to earnings growth" in stocks, as the escalation of the U.S. and China trade war, is still a risk, though momentarily less likely. 

Villere Balanced Fund, which manages $2.1 billion, is now holding 15% of its assets in cash. George Young, portfolio manager of the fund, is "looking for dips in the market to buy into new companies at more reasonable prices," he wrote in an email. 

These aren't necessarily huge managers moving into cash, but if this trend continues, some assets would have to sell off. That could easily be stocks. Currently, the 10-year treasury is yielding 1.74%, slightly up from 1.55% a week ago, but still low. Meanwhile, stocks have risen, with the S&P 500 at a 19% gain for the year, bringing the average forward one-year earnings multiple above 18. That's higher than the five-year average and the 10-year average of 14.8. The higher multiple leaves investors with a tough choice between a treasury fully pricing in two Federal Reserve rate cuts and a stock market reflecting low rates. 

"They [investors] are moving into cash," Jim Carney, founder and CEO of Purples Partners told TheStreet over the phone. "Risk aversion is definitely a big thing." Still, Carney sees room for stocks to move higher, even as investors pile into cash because "there's enough people buying stocks that it [some risk aversion] doesn't seem to affect anything." He said "there's unlimited cash on the sidelines," a trend that has been a theme throughout 2019. With cash still available to be put to work, Carney sees stocks having some level of upside from current levels. 

For investors certain in their bearish calls, cash may actually not be the best option. UBS' Chief Investment Officer of Global Wealth Management, Mark Haefele wrote in a note out Wednesday, quality stocks (which include cyclicals such as tech and some consumer staples) are the way to go, as "growth is slowing, and trade uncertainty remains high." 

The average dividend yield on the S&P 500 is far higher than that of the treasury market. And consumer staples like Procter & Gamble (PG) and Coca-Cola (KO) pay dividends that yield 2.47% and 2.93%, respectively. 

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