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Low savings yields lure the wary back into the market

Greg McBrideIt has been two years since the stock market peaked amid a wave of technology and dot-com euphoria. Investors who ran for cover in cash investments now may be climbing out of their comfortable beds of cash and sniffing the air to see if it's time to get back into the market.

As stock prices fell over the past two years, more money gravitated into liquid money-market investments. Since March 2000, total assets in money market mutual funds have grown by more than 37 percent to more than $2.2 trillion. This translates to nearly $625 billion more that is now stashed in money funds. Two years ago, the decision was easy. Interest rates were near five-year highs, and the average yield on money funds was 5.4 percent, an enticing shelter from the tempest brewing in the stock market.

Over the past two years, what began as an "inventory correction" grew into an economic slowdown and finally a recession. The Sept. 11 terrorist attacks also dealt the economy a severe blow.

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But the downpour of bad economic news has stopped. Jumpy investors can now peer out and see brighter skies -- the economy is emerging from recession and the beleaguered manufacturing sector also shows signs of rebounding. Even Federal Reserve Board Chairman Alan Greenspan is less dour, giving an upbeat report to the U.S. Senate on March 7.

However, the landscape has been altered by the economic storm. With interest rates having been slashed to 40-year lows, the average money fund yield is 1.39 percent, and the average bank money market account yields 1.09 percent. The S&P 500 is 23 percent below the point seen in March 2000. But the current dividend yield of 1.43 percent exceeds the return on the average safe haven money market investment.

With the worst of the economic slump in the past and investors a little less concerned about accounting scandals, the stronger upside of stock prices is once again visible on the horizon. All this makes wary investors more willing to trade-in the downside protection afforded by cash investments for the upside of stocks.

Investors have begun to take note, with the stock market rallying 5 percent in the first week of March. The rally is bound to have its fits and starts as a great deal of positive earnings in 2002 is factored into current prices. As of Feb. 28, prior to the recent run-up, the S&P 500 carried a lofty price-to-earnings ratio (P/E) of 28.6, nearly double the long-term average. Earnings definitely have some catching up to do. But stock prices move on profit expectations, and those expectations call for higher profits.

The prospects of a stronger business and economic climate, a corporate profit recovery and the lack of incentive to remain in safe-haven investments are all certain to lure back many stock investors who fled the stock market storm over the past 24 months.

Greg McBride is a financial analyst for Bankrate.com.

For advice regarding your specific situation, please e-mail one of Bankrate.com's Q&A experts or visit the Personal Finance Advice channel on Bankrate.com.

-- Posted: March 8, 2002

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