Some Quick Takeaways From Still-Elevated Money Market Levels
When Covid-19 first struck and the stock market crashed, many investors were rightly fearful. The market plummeted in a historic fashion, and the chaos in the real world added a genuine uncertainty. Amid this environment, cash in money market funds increased by trillions of dollars. A year and a half later, however, and cash levels remain elevated–despite the stock market’s historic rally. There’s a lot going on here, so let’s do a grab-bag of takeaways for how to think both about cash on the sidelines and investing amid uncertainty.
▪ There are still buyers. There are countless factors that influence stock prices—the macro environment, company earnings, currency swings, etc. But sometimes it’s as simple as, “more people want to buy than sell.” With interest rates suppressed and trillions earning next-to-nothing in savings, there is more than enough cash ready to buy stocks and support the market on downturns(perhaps partially explaining the last year’s lack of downside volatility).
▪ But the dip may never come. Those who were on the sidelines for the market’s bounce off the March 2020 lows might have decided to wait for another crash to buy back in. After all, the pandemic was just getting started—another selloff seemed inevitable. Of course, the market has gone on to double since, with scant few dips along the way (including a historic stretch over the last year with just a single 5% pullback). Timing the market in this way is nearly impossible; getting invested as soon as possible has been the more winning strategy over the last century.
▪ Get comfortable with being uncomfortable. Geopolitical tensions, financial crises, political squabbling, economic upheaval—all have been mainstays of the last 75 years, and yet the S&P 500 has returned ~300,000% over that time anyway. In spite of fear and uncertainty gripping the real world, investing around the Covid-19 pandemic lows proved one of the savviest decisions an investor could make. In truth, by the time investing feels safe, most of the gains have probably already been made.
▪ Cash isn’t cheap. Not only are interest rates historically low, but with inflation again a major factor in our lives, the real return on income-producing assets is lower than ever. Getting 0.01% in a money market fund isn’t much of a return when consumer prices are up ~5.00% year over year. There are still good reasons to hold cash and short-duration fixed income (e.g. short-term savings, imminent purchases), but the cost of doing so is high.
To put a bow on this haphazard collection of bullet points: with uncertainties mounting and the cost of holding cash higher than ever, financial planning and asset allocation decisions become even more critical. Reach out to us today to discuss your plan and how to strategize for the challenges to come.
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