Market Pulse: Good news for savers, Part II
In my last article, Good News for Savers, I encouraged locking in today’s rising yields on bonds and preferreds. There is another security that savers are finding attractive: money-market funds. Savers can receive 4.4% in risk free government money market funds. And many are choosing to do so.
There are upsides and downsides to owning these funds. Receiving 4.4% interest is far more attractive than the funds paid a few years ago. And with the banking crisis many are comforted with the risk-free nature of owning a T-bill money market fund. The price is $1 and there will be no volatility.
Another reason to be in the money market is that it represents cash that can be put to work after the next market panic or during what is likely to be an upcoming recession. Of course, buying when others are selling is easier said than done. But that’s how fortunes have been made.
For these reasons savers are piling into money market instruments. Money market assets have surged to a record high of $5.1 trillion. If a bubble is forming in today’s market one would have to point toward money funds. Wall Street rarely rewards the herd so it is important to know the downside of being in these funds.
One obvious downside is if the money market pays 4.4% and inflation is 6% then holding cash is a guaranteed after-inflation loser. Money market instruments are not long-term investments. There will come a time to put cash to work. Plan on it.
Another reason is that money market rates fluctuate. Today’s rates can quickly fall to 2.5% if we enter a recession or the Fed cuts rates. To use real estate terminology, one shouldn’t get an adjustable rate mortgage when rates are low and then switch to a fixed-rate mortgage after rates rise. That’s why I continue to think it’s a good time to lock in yields from high-quality bonds and preferreds.
Speaking of a recession, the likelihood of entering one is increasing thanks to instability in the banking sector and the Fed’s rate hikes. Stock prices reflect that. It may be that the Fed wants a recession as that could be the only way to reach its 2% inflation target. That would be a high price to pay for reducing CPI.
Except for financial stocks, the stock market is holding up well despite all the bad news. Even after all the rate increases and some bank failures, the S&P 500 excluding dividends is where it was last May. Dividends matter.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
Support Local Journalism
Support Local Journalism
Readers around the Lake Tahoe Basin and beyond make the Tahoe Tribune's work possible. Your financial contribution supports our efforts to deliver quality, locally relevant journalism.
Now more than ever, your support is critical to help us keep our community informed about the evolving coronavirus pandemic and the impact it is having locally. Every contribution, however large or small, will make a difference.
Your donation will help us continue to cover COVID-19 and our other vital local news.