Two years ago I had a post titled "Avoiding recession is all that matters." The central point of the post: "When yields on risk-free assets are close to zero, it only makes sense to hold those assets if you need liquidity and/or are highly concerned about the potential for losses in other assets, most of which are yielding substantially more." That same advice still applies today. Cash only makes sense as an investment if you really believe we are headed for a recession. Otherwise you can earn substantially more on a variety of decent investment alternatives (see this post for a chart of the current yields on select investments). That so many people still cling to cash—retail bank savings deposits, which pay virtually nothing, now total $7.7 trillion, up from $4 trillion just five years ago—is evidence that lots of people are still very worried about a recession.
The big news yet to come will be when millions of people holding trillions of cash decide it no longer makes sense to hold so much cash because they no longer worry about another recession. That's when the Fed will need to start tightening monetary policy big time. So far, there's still a healthy amount of skepticism out there, and the demand for money is still quite strong.
The news of late continues to suggest that the economy is growing and that there is no recession on the horizon. We aren't seeing robust growth, but neither are we seeing any of the signs that ordinarily precede a recession. The yield curve is not inverted; the Fed is not tightening aggressively; real yields are very low or negative; and swap spreads are at normal levels.
Today's release of the January ISM report on the service sector was unremarkable, except to the extent that it showed no sign of significant deterioration. Indeed, the business activity index, shown above, registered a level that is reasonably strong.
The non-manufacturing composite index, shown above in blue, also suggests that the service sector remains reasonably strong. It's encouraging that the Eurozone service sector appears to be enjoying a bit of improvement after a multi-month slump.
The above chart shows yet again that there is a lot of worrying going on out there, despite the evidence of continued economic growth and healthy corporate profits. The Vix index is still elevated, and 10-yr Treasury yields are still very low, and both are signs that the market worries about the economy's growth potential and worries that unpleasant things could lie in wait just around the corner.