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Low CD rates fueling a stock rally?

By Claes Bell ·
Monday, February 27, 2012
Posted: 5 pm ET

Is the current stock market rally being fueled by habitual CD investors finally getting fed up with low CD rates? That's exactly what one wealth manager wrote in a really interesting column for the Montgomery Advertiser this week. From John Norris, head of wealth management at Oakworth Capital Bank:

Investors want a higher rate of income but don't want to take too much additional risk. Well, if wishes were fishes, we would all have a fry. As such, I believe the force behind the rally this year is folks essentially giving up the ghost.

They don't particularly want to be more risky, but what choice do they have if they want to generate more income or a higher rate of return? When banks are paying 5 percent on a CD, some investors might think that absolute return is just fine and will forego anything riskier. However, when you have to shop around to get 1 percent, those same investors will eventually move out of their comfort zone.

Norris then goes on to relate the story of his own parents, habitual CD investors who had been content with rolling over their nest egg year after year. This year, though, with their CDs maturing and current CD rates at record lows, Norris advised them to put their maturing CD balances in short-term bond funds instead. Norris theorizes that a lot of retirees are in similar circumstances, and that's the primary driver behind the current stock market rally.

I think that Norris is correct that CD investors are becoming more desperate for return, and some may be moving into the stock market. But looking at the Federal Reserve's deposit data, we've only seen about a $15 billion drop in small-denomination time deposits, which is Fed-speak for CDs. That sounds like a lot, but since the beginning of the year, we've seen the Wilshire 5000 stock index rise in value by over $1 trillion, which makes that $15 billion look like a drop in the bucket.

His larger point, though, that many conservative investment are pushing into riskier areas of investment than they're used to, rather than cooling their heels in a deposit market with record low rates, is very valid, I think. I'd urge any do-it-yourself CD investors chasing yield into non-FDIC insured investments to see a fee-only Certified Financial Planner, though, before going too far down that path. If you're used to the simple, risk-free world of CDs, stocks and bonds can be pretty intimidating, and if mismanaged, extremely risky.

What do you think? Are CD defectors behind the stock market rally? Would you consider migrating from CDs to other investments to chase yield?

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April 24, 2012 at 11:46 pm

Yes, I am liquidating all my CDs and moving most of I get into my brokerage account buying Exchange Traded Funds. A small percentage will stay in my savings account for emergencies (i.e. loss of job, health insurance, etc.). I am definitely moving out of my comfort zone by putting together a "lazy portfolio" of ETFs in a buy-and-hold long term strategy for the next decade or so.

February 28, 2012 at 7:42 am

I think that Norris makes a very good point. Even cautious investors can be assured that the worst is over in terms of the financial crisis and higher yields are on the way. However since it seems that CD yields will take a long time to recover, it makes sense to invest more heavily into the stock market. Also people are realizing that the market hit bottom and will be moving upward, so they want to get "in on the ground floor." Perhaps the days of hiding gold bricks in your yard are finally behind us.