Low savings yields lure the wary back
into the market
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
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.
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
Greg McBride is a financial analyst
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-- Posted: March 8, 2002