It is no secret that the stock market has experienced a great deal of volatility since the start of 2022. The declines we have seen in the markets recently have created an appealing opportunity set among both equity and fixed income securities. With prominent indexes like the S&P 500, NASDAQ, and Barclays Aggregate Bond Index all trading at significant discounts compared to where they were in late 2021, we think it is a great time to be invested to capitalize on potential upside. However, the current environment has also made investors rethink how they are treating excess savings with the reemergence of attractive rates among Money Market Funds, Certificates of Deposit, and Treasury Bills.
One of the largest headwinds we have been facing in the economy over the last 18 months is an abnormally high and stubborn inflation number that has eaten away at consumers purchasing power. This has forced the Federal Reserve to react by increasing interest rates, thereby slowing the economy and inflation. A positive byproduct of these rate raises is a market that is now rewarding investors for lending out their money. By utilizing vehicles such as Money Market Funds, CDs, and Treasury Bills, investors can earn annual interest in excess of 4% without experiencing the volatility of the equity market.
The chart above demonstrates how the federal funds rate has changed over the last 1 year. After the most recent .25% rate hike this month, the federal funds rate sits just below 5%. The cash management vehicles discussed above such as Money Market Funds, CDs, and Treasury Bills tend to have yields in the same ballpark as the federal funds rate.
While moving funds out of equities or high yielding fixed income instruments into these traditionally safer vehicles is not generally advisable after a downturn, it has become an attractive opportunity for investors with cash stockpiled in low interest bank accounts that are looking to avoid the volatility of the market. This approach to cash management when utilized on savings in excess of 3-6 months of living expenses can be a great way to earn some interest on funds that are sitting on the sideline.
For those willing to take on a bit more risk in their cash management strategy, structured note products can be utilized or combined with the vehicles outlined above to achieve a higher overall yield. Creating a combination of notes and treasury like securities can be another great way to earn competitive returns on cash that would otherwise be earning very little in a bank account. Equities remain the space with the highest overall return potential, especially after the downturn we have experienced, but there are now other ways to take advantage of the current environment.
Feel free to reach out to our team if you have any questions about cash management or investments in general.