Wall St. and Business Wednesday: E-Letter To Sheree R. Curry and Blackenterprise.com Re: "CDs, Money Markets Back In Vogue"
The timing of your concise article, "CDs, Money Markets Back In Vogue" could not be any better for me. It just so happens that a few days ago I visited one of the branches of Industrial Bank, one of this country’s historically Black-owned banks and checked out the interest rates they offered for certificates of deposit (CDs.) With the Federal Reserve raising rates, the stock market falling, housing market in decline, and gold at record levels, you are absolutely correct, CDs and Money Markets are hot once again.
As you wrote, "Certificates of deposit and money markets are traditionally safe ways to stash your cash. Thanks to rising interest rates, the return on these accounts has edged toward 5%, rivaling stocks and bonds as profitable investment vehicles."
Indeed with inflation fears making bonds look shaky, the Dow dropping over 1,000 points and the S&P 500 down 5% since mid-May, the increasing attractiveness of stashing cash is a natural consequence. Money managers and strategists are increasingly advising their clients to take some of their money out of stocks and bonds and into ‘cash.’ I even saw controversial financier George Soros say, ‘Cash, preferably anything other than the dollar, is King’ on CNBC Monday.
With the Federal Reserve having raised interest rates 16 consecutive times since June of 2004, it was only a matter of time before the offering of CDs and retail money market funds became the rage. Money market funds which invest in short-term debt are determined by market rates and as the Fed continues to raise short-term rates, these rates are expected to rise above 5% within weeks. Things are not all bad when the Fed raises interest rates, as I reinforced to Ellen McGirt of Fortune magazine in a recent letter I wrote her. There are many losers, but also more than a few winners, in the right place at the right time.
You know something is at work when respected Merrill Lynch & Co. U.S. Strategist Richard Bernstein influences the firm’s recommended cash allocation to 20%. If the stock market continues its troubles, and inflation continues to eat away at the bond market more and more people will look to parking their paper. And they arrive they will find the lot quite crowded. According to The Wall St. Journal, last week, " Money in retail certificates of deposit exceeded $1 trillion earlier this year for the first time since 2001, according to Federal Reserve data, while deposits in savings accounts, including money-market deposit accounts, are now at record highs of $3.6 trillion. Investors have also pumped $171.2 billion into taxable money-market mutual funds over the past year, compared with out-flows of $117.4 billion the same period a year ago, according to iMoneyNet.com. Year to date, %29.25 billion of new cash has gone into money-market mutual funds, compared with the year ago period when investors pulled out $76.83 billion."
I especially appreciate you pointing your readers to the informative RateAPY.com and Bankrate.com web sites nationally and locally which allow you to compare rates with their CD calculators. I was disappointed at the rates offered by Industrial Bank in comparison to the Washington D.C. area average and national choices, but I was pleased with their minimum deposit levels across time horizons, which are lower than most banks I looked at. More people can afford to enjoy a CD as a result.
At our Black Electorate Economics University (BEEU)in this coming Semester II, "Personal Finance - Financial Literacy and Turning Money Into Wealth" we will be comparing and contrasting savings account and CD rates across this country's Black-owned banking institutions.
While there is no denying that, relatively speaking, things have changed for the better in terms of ‘cash’ investments, it is important to note that investors should be cautious in how they chase returns and weigh the risks and rewards of increasingly relying on cash. After all, inflation also eats away at the returns one receives from a CD or money market. "Make sure that wherever you put your money, you are earning a rate which exceeds inflation. Inflation rates change, but a good benchmark is to lock into something that is above 3% to 4%," as you quote Syracuse Professor Boyce Watkins as saying.
Even that might not be enough.
Yesterday I spoke to Polyconomics Director Of Market Strategy, Paul Hoffmeister. He uses the price of gold to measure inflation and the effectiveness of a cash strategy. Mr. Hoffmeister cautions:
"When the dollar-gold price, a leading indicator of inflation, hovered around $730 an ounce, the annual inflation rate during the next 10-15 years could have been expected to be more than 5.5%. With gold currently at $570 an ounce, we could expect about 3.5%. Since inflation insidiously eats away at cash and bond holdings, folks should pay attention to the geopolitical environment, particularly the situation in Iran, as to how it affects gold when considering CDs and money markets to make sure that the price of gold does not spike again. If international geopolitical situation deteriorates from here, then gold could jump again and erode the real values of cash and bond holdings. Furthermore, it's important to note that it would have obviously been better for investors and strategists to have made the call to be out of stocks and in cash over a month ago before the recent stock market sell off. We may have to have another round of bad news causing a further decline in the stock market for this strategy to look as promising as some make it out to be today."
Plenty of food for thought. I hope that you will continue to write on this important development and weigh even more factors than you already have.
Wednesday, June 14, 2006