Now that the Fed has cut rates, here's what UBS says to do with your cash

UBS is urging institutional investors to reallocate their substantial cash holdings, currently totaling $7.3 trillion in money market funds, following the Federal Reserve's recent rate cut and projected further easing. Citing declining yields on cash and its historical underperformance against diversified portfolios, UBS recommends a strategic approach including phased equity investments with a focus on AI and resources, selective high-quality dividend stocks, and attractive fixed-income opportunities such as agency and commercial mortgage-backed securities, which are expected to benefit from a dovish Fed outlook.

Analysis

The Federal Reserve's recent 25 basis point rate cut, coupled with signals of two more potential cuts this year, creates a compelling catalyst for investors to reassess their substantial cash positions. According to the Investment Company Institute, a near-record $7.3 trillion is currently held in money market funds, which have been yielding attractive rates like the 4.09% seen in the Crane 100 index. However, this yield environment is poised to deteriorate with further monetary easing. UBS analysis underscores the urgency, highlighting that cash has historically underperformed a diversified U.S. stock and bond portfolio 74% of the time over one-year horizons and 83% over five-year horizons since 1945. Consequently, UBS advocates for a strategic deployment of capital, recommending a phased entry into global equities during market dips, citing supportive tailwinds from lower rates, robust earnings, and AI. The firm specifically points to long-term outperformance potential in artificial intelligence, power, and resources themes. For income-focused investors, the guidance suggests seeking replacements for declining cash yields in high-quality dividend stocks, such as Johnson & Johnson (2.99% yield) and Valero Energy (2.76% yield), and within the fixed-income market. Leslie Falconio of UBS finds agency mortgage-backed securities (MBS) particularly attractive, offering high-quality, liquid exposure with ~5% yields and spreads that remain wide of historical averages, while also favoring AAA-rated commercial MBS as a direct beneficiary of the dovish Fed outlook.

Key Decisions for Investors

• Investors should urgently review their large allocations to cash and money market funds, as the Federal Reserve's easing cycle is set to erode yields, increasing the opportunity cost of holding cash.
• Consider a disciplined, phased deployment of excess cash into global equities, focusing on secular growth themes like AI and resources, or on high-quality dividend payers such as Johnson & Johnson and Valero Energy to secure alternative income streams.
• Evaluate opportunities within fixed income that offer superior yield and potential for spread compression, specifically agency mortgage-backed securities (MBS) and AAA-rated commercial MBS, which are positioned to benefit from a more dovish monetary policy.
• To manage timing risk, implement a strategy of averaging into equity positions during market pullbacks rather than making a single lump-sum investment.