Caution Rules, and Cash Is Best

That's what experts are advising as the stock market wilts under worries such pricey oil, weak hiring, and terrorism fears

By Karyn McCormack

Cash is sounding a lot better to some folks on Wall Street these days. This summer, a number of market strategists and chief investment officers are advising people to shift money out of equities and boost their cash positions.

Leading the way in the push to cash is Standard & Poor's, which has lowered its recommended asset allocation to stocks three times since June and boosted its cash portion to 40%. "Until the economy shows signs of renewed strength or the market bottoms firmly, we advise keeping only 40% of assets in domestic equities, 10% in foreign stocks, 10% in bonds, and 40% in cash," explained S&P on Aug. 6.


  While stocks shrugged off the heightened terror alert for certain financial institutions in early August, says S&P, the price of crude oil is a bit harder to ignore when it closed above $44 a barrel. Oil has moved nearly $2 a barrel higher since then. And the weak July employment numbers boltstered S&P's view on cash, the research firm says.

The next highest allocation to cash among the major Wall Street firms is SunGuard Institutional Brokerage. The firm has been recommending a 30% cash position since early March, the top of its normal range of 5% to 30%, says Trip Jones, managing director of sales. SunGuard recommends 45% of assets in stocks and 25% in bonds. The March call turns out to be prudent as the market started heading south that month and has had a fair share of fits and starts since.

Among 13 large Wall Street investment firms, the recommended allocation to cash has risen to an average of 10.3%, from 8.1% at the start of the year, says Chris Johnson, director of quantitative research at Schaeffer's Investment Research. That compares to a low of 4.1% allocated to cash in September, 2001.

For long-term investors, the wisest thing is to do is probably keep most assets in stocks. But in the near term, Wall Street experts and individual investors are in a quandary. "There are a number of overhangs -- the election, war in Iraq, and oil -- that are preventing long-only managers [who must be invested in stocks] from making decisions one way or the other," explains Nick Bohnsack, investment strategist at ISI.


  Among the market watchers that have turned more cautious is Mark Keller, chief investment officer at AG Edwards Asset Management. He raised his recommended allocation to cash from 10% to 15% and reduced equity exposure from 70% to 65%. At the time of the change on July 12, he says, negative sentiment was building amid rising concerns about climbing oil prices and terrorism.

"There's no two ways about it, we're in a market that has not a lot of friends right now," he says. And now that the market is in a "corrective phase," it's not too surprising that investors are getting more defensive and raising some cash. "People don't want to be hung out to dry."

Given the market's recent technical deterioration following the July employment report and "painfully high oil prices," Liz Ann Sonders, chief investment strategist at Charles Schwab (SCH ), pulled back her recommendation on stocks from maximum-overweight to slight-overweight. She put the proceeds of the weighting change to cash, which is now slight-overweight, instead of bonds on her belief that bonds should remain "under-represented" while interest rates rise.


  "The market has been testing the mettle of the bulls for much of this year, and with the recent much-weaker-than-expected payroll numbers, we're now at a very sensitive point, both technically and emotionally," she wrote in an Aug. 13 note. Besides the terrorism fears, the powerful catalyst for the market is oil prices, she says. "If oil approaches $50, then the market could see more headwinds," she says.

To be sure, fussing about market allocation is tricky. With the S&P 500 index already down about 8% from the year's high, SunGuard's Jones questions whether this is the right time to substantially raise cash. "It depends on how bad you think the market will fall out of bed" from here, he says. There has been plenty of talk about when the market will hit bottom. Says Sonders at Charles Schwab: "I think we're due for a rally, at least an oversold rally." If so, that could leave investors stuffed with cash in a pickle.

Yet, with nothing on the horizon to turn market sentiment around, investors who are on the sidelines with cash might end up sitting pretty.

McCormack is senior producer for BusinessWeek Online in New York

Edited by Beth Belton

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