The Year of the Fighter

Just for a moment, I want you to take everything that happened in 2022 … and throw it out of the window. 

If I had to describe this year in a few words, 2023 was the year of the fighter.

We kicked off the year with the possibility of defaulting on our national debts. Across all sectors, nearly all of the Q1 earnings guidance was negative. Then bam! A banking crisis. SVB, Signature Bank, First Republic. They wanted to know if Charles Schwab was next! Nowhere was safe. People began questioning FDIC insurance. 

In the backdrop, the Fed pulled interest rates up from the mud at the fastest pace in history. Still, there were good and bad coming out of this higher rate regime. However, the consensus was that the consequences were skewed toward the bad. 

But despite the gloom, the economy resisted every call for a recession, whether deep, moderate, or slight.

Higher rates, a weapon in this battle, were expected to impact these sectors very differently. Look how that turned out:

Fidelity Investments, Sector Research

The resilience displayed by each of these sectors showcased the year as a testament to the fighting spirit.

Now, as we bid farewell to this year’s challenges (and triumphs), the spotlight turns to the strategic decisions investors face: 

Does more safety make sense given risk-free yields? And given all the benefits cash now holds, is cash fair competition to bonds?

Choose Your Fighter: Cash vs. Bonds

Is it wise to hold more cash— or to reinvest maturing Treasuries into the next—rather than dealing with the stomach-churning ride you get with investing that money in assets that don’t provide the same guarantee?

It’s important first to evaluate your liquidity needs. 

For starters, cash is king. Providing immediate liquidity and a known value. Money market funds add an enticing layer to the cash conversation, offering yields upwards of 5%. 

On the other hand, bonds can be simple. You can think of them as safety and support in the portfolio, too, but understand there are risks. Not to rehash 2022. 

Still, despite the allure of cash yields today, resist the temptation of viewing it as a replacement for essential components within a portfolio. 

Jean Keener CFP, CRPC, advocates for a bucketing strategy based on the time horizon for the invested funds. Expenses within a year (or a year and a half at most) are deemed suitable for holding in cash.

However, if you’re hoarding 5 to 6 figures in cash with no intended use because “I’m getting a pretty good rate on it, why touch it?” you could be missing out on big opportunities, even if they’re less obvious than years prior. 

Note that cash can serve as a source of income, too, but it doesn’t provide the long-term growth potential of other investments.

JP Morgan, 2023 In Review

Looking forward, let’s say we actually pull off a soft landing, and the Fed decides to cut rates given that we’ve reached our target. The bonds you locked in will continue to pay what they’re paying. However, cash will quickly follow suit with short-term rates

Vanguard, Morningstar, and I’m sure plenty of others I’m leaving out are calling for rate cuts in 2024.

Of course, we have no idea what’s going to happen. If nothing is broken, the economy keeps humming along, and inflation remains stagnant, the Fed could decide to sit on their hands in the new year. However, Jay Powell did hint that there could be as many as three cuts next year

If rate cuts do materialize, 2024 could mark another historic year for bonds, but this time for the better. Bond yields bought today would remain stable, yet the price of those bonds may appreciate significantly, offering both income stability and growth. 

To that point, Adam Schrier, CFA at New York Life, highlights that being early makes a meaningful difference. Following the last rate hike, the aggregate bond index and investment grade bonds pummel cash over a 36-month period. 

The tradeoff for safety is that cash doesn’t rally. Cash would quickly adjust to short-term rate changes. Meaning when short-term rates begin to decline, so too will the rate on your cash. 

Even though equities are tickling all-time highs, it doesn’t mean you’ve missed out. One of cash’s strengths is flexibility and being able to be deployed at a moment’s notice.

The last time the Fed lowered interest rates pre-emptively (in 2019), the S&P 500 rallied about 30% and investment grade bonds returned nearly 9% that year,” JPM Global Investment Strategist writes. 

The Curtains Come to a Close

As we wave goodbye to the challenges of 2023, this year’s financial landscape has proven that adaptability and strategic thinking are key. 

Thank you, 2023, for allowing us to feel a bit more like “normal.” 

Although, for the first time, at least in my career, we are seeing cash yield enough to actually make saving enjoyable, dare I say. 

And as much as I’d love this to be the simple solution to our investing qualms, 2023 proved that it’s never that easy. Just when you feel like you’re comfortable making 5% on your money and calling it a day, the S&P is up almost 25%, the Q’s more than 50%, and longer duration bonds touching 6% yields. 

The options on the table were crazy!

This is obviously not to say cash is not important—especially in a retiree’s portfolio—but it always comes down to sizing and time frames. 

Looking back, this year was truly the year of the fighter. I just hope you chose your fighter wisely. 


Thanks for reading and Happy New Year!

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

No Responses