Will Cash Be the Best Performing Asset in 2022?


By Kylie Purcell

In case you missed the story of the week, U.S. inflation just hit a fresh 40-year high.

That means cash is becoming less valuable every day. In fact, if inflation levels stayed the same for another 10 years, cash would then be worth around half of what it is today. So it might seem strange that cash has been named as most likely to be the top performing asset class in 2022 ahead of stocks, bonds, cryptocurrency, NFTs and property.

In a recent global survey by Finder, 34% of people in the U.S. said they thought cash would be the best choice for their money in the year ahead. This was followed by property, stocks and then cryptocurrency. Meanwhile, bonds, commodities and NFTs were considered the least likely to be top performers, the latter despite soaring energy and food prices.

History tells us it’s not impossible for cash to outperform all other asset classes, however it is rare. If the last few years have taught us anything, it’s that we should learn to expect the unexpected.

So let’s look at whether there might be a case for cash as the top performing asset in 2022.

Why cash could top the list

Firstly, it pays to separate cash from “cash assets” as an investment. If you kept your cash under the bed for instance, it’s hardly an investment as it won’t generate a ROI without investing in anything.

However, cash equivalents such as short-term treasury bills (T-bills) and interest-earning bank accounts can and do return a small profit back to investors.

Cash products typically offer a low, fixed interest return and are easily transferable back into cash. Importantly, they’re safe because they’re backed by governments or banks. Like with any type of investment, that security comes with lower investment returns. Historical data shows that 3-month T-bills (often used as a stand-in for cash) is the worst performing asset over the last century compared to stocks, bonds and property.

If you’d invested $100 in 3-month T-bills in 1928, you would have just over $2,000 today, according to data collected by NYU Stern School of Business. That compares to over $761,000 if you’d invested it into the stock market over the same period.

Despite this, cash has actually beaten the S&P 500 on 30 occasions over the last century when looking at the performance of each in a single year. That’s around 30% of the time since 1928.

The reason for this primarily comes down to stock market volatility. Cash typically outperforms the stock market when there has been a market downturn or correction.

So far this year, at the time of writing the S&P 500 is down by more than 12%, while the NASDAQ is down more than 18%. Bitcoin has also fallen 17% year-to-date, while Ethereum has been down for most of the year. Cash is currently outperforming stocks and major cryptocurrencies this year by merit of being flat. Whether it will beat property remains to be seen. In a recent Reuters survey, property analysts predicted U.S. house prices would rise around 10% in 2022, despite forecasted interest rate hikes.

What history tells us

While cash assets have beaten the stock market on numerous occasions over the past century, there have been very few instances where it has also outperformed corporate bonds,  government bonds and property.

Between 1928 and 2021, cash has been the top performer among these assets on just eight occasions. The last time this happened was in 1994, which coincided with the Federal Reserve raising the interest rate by 25 basis points for the first time since 1989.

Cash assets also performed particularly well during the stagflationary 1970s and 1980s period. In 1981, 3-month T-bills rose as high as 14%, beating stocks (4.7%), bonds (8.2%) and even real estate (5.1%).

That period of time has come into discussion again because we’re now facing similar stagflationary conditions, where inflation is surging thanks to skyrocketing oil prices and a long period of low interest rates.

If history repeats itself and the Fed hikes rates quickly over the next few months, it’s reasonable to think that cash could outperform all other assets, barring a stock or crypto market rebound towards the end of the year.

Rising interest rates

With interest rates at record low levels around the world, cash has been a bad place for investors to keep their money for some years.

U.S. interest rates have been dropping since the GFC, now sitting at 0.08% as the Fed attempts to motivate the economy to keep spending and growing. When interest rates are low, yields offered by cash products are also low, making stock and property investing comparatively more attractive.

However that’s all set to change in 2022, with many analysts expecting the Fed to raise interest rates several times throughout the year. Cash rates have already started rising in preparation for these expected changes. The 3-month T-bill yield rose from 0.09% at the start of 2022 to 0.38% by March 10th, and is likely to continue upwards if interest rates rise further than expected. 

Unfortunately the Fed is now faced with a difficult balancing act, made all the harder thanks to the Russia-Ukraine crisis. The Fed knows it must raise the cash rate to combat high inflation, but also that doing so could send the U.S. into a recession. An event many analysts now believe is likely.

That takes us back to the original question: Will cash be the best performing asset in 2022? There are too many moving parts to know for sure. If the Fed decides to raise interest rates by a significant margin over the course of the year, history tells us to expect stocks to fall, property to fall and T-bills to rise. 

If inflation becomes unmanageable and fears of a recession set in, the Fed might choose a different path.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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