This is the situation. According to preliminary data, inflation in the US is declining, the economy has not only left behind the threat of recession but is also expected to grow by 2.5% in 2023. But the expectation is that there will be a mild recession and, given price developments, the way will be paved for the first interest rate cuts.
According to Fidelity analysts, these forecasts will come from savers and investors who have opted for liquidity as the impact of restrictive monetary policy continues. “Over the past two years, many investors have watched yields on higher-risk CDs, short-term bonds and bonds rise. money market funds“They’ve found they can earn 5% on their money without the ups and downs of investing in stocks.”
But, experience over the years shows that when the economy slows down, interest rates are reduced. “It means they have attractive interest money market fund They will also go down and that also means that short-term CDs and bonds will go out and there will be no others that will pay as much as the previous ones,” he explains in Fidelity.
Many savers and investors will begin to question what to do with their money. And we are talking about a lot of money.
A lot of money accumulated in safe investments
Wells Fargo investment strategists Michael Taylor and Doug Beith explain that the balance sheet for July 2022 to December 2023 money market funds They went from US$4.6 billion (billions in English) from US$5.9 billion, “In 2023 alone, money inflows into these funds were $1 billion, an annual increase of 24%,” he elaborates.
The data handled by them shows that 61% of the amount has been deposited money market It is in the hands of institutional investors and 39% is in retail accounts. In view of this, investors may also consider higher returns as risky. appreciation of S&P 500 Index Last year (+26%).
Markets are hopeful that part of those billions will be reinforcements and help boost valuations that have already driven the Dow Jones and S&P 500 indexes to multiple records in January.
But Taylor and Beth show some caution. Traditionally, investors hold liquid assets as a protection strategy in periods of uncertainty. This is something that happened during the great financial crisis and at the beginning of the pandemic. “But recent capital inflows may have led to attractive returns with minimal volatility risk,” he says. That’s 5% without risk.
In fact, their calculations show that a good portion of the deposits money market funds Over the past 18 months “they have likely come from low-interest savings accounts, which automatically makes them not suitable for investing in stocks.”
But how to undo posts? cash When the stock market is at such a high level, what path will profits take?
How and when to invest the money we now have in cash
Wells Fargo strategists suggest overexposed investors cash “That considers market corrections to invest in a diversified portfolio, resetting or maintaining strategic objectives.”
The development of the stock market at the beginning of the year has been encouraging. Is there a window of opportunity?
Sameer Samana, who is also a strategist at this bank, explains that the record in the market “came from the expectation of a combination of aggressive rate cuts, a still strong economy and easy financial and credit conditions, factors that often do not coincide. ” Samana believes that disappointment “when it is seen that the reason for investment is based on hope rather than reality, will cause the market to question their support.”
Fidelity strategist Dennis Chisholm believes that in all history, after the first rate cut by the Fed, stocks are a better choice than bonds in both recession and non-recession scenarios. “If corporate earnings pick up, as I think they will, a recession would be unlikely and that would mean stocks would benefit before and after the first rate cut.”
This is what this strategist believes Stocks of small capitalization companies At the moment they have more of an upward trajectory because their valuations are not that high (Russell 2000 Small Cap) and they are betting on cyclical sectors, “and in real estate in particular” they could have good growth in 2024 .
Chisholm points out that other cyclical sectors have also benefited disproportionately in scenarios of falling rates and rising profits. Consumer discretionary is followed by technology, materials, finance and industrials., “Defensive actions such as electricity, basic consumption (staples) and health has lagged behind.”
On the more conservative side, Lisa Shalett, director of wealth investing at Morgan Stanley, told a podcast from her bank that interest rates money market Still “reasonably competitive”. “But if (interest) rates fall very quickly then we have to ask ourselves why that is, if it is because we will have deflationary growth then that could be a signal that we have to invest in riskier assets. “
According to Chalet, if the Fed cuts rates as economic conditions worsen, staying in cash “might be the right thing for a while, even if yields go from 5% to 4% or 3.5%.”
Morgan Stanley maintains a very conservative position with respect to capital markets. “We think US equities could return 4% to 6% in 2024, in a context where earnings growth could be 10%.”
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(TagstoTranslate)Money Market Funds(T)Interest Rates(T)Stock Investing(T)Michael Taylor