with the S&P 500 And with Treasury bonds falling sharply in March, investors are shifting to cash for safety. As of the end of February, money market funds held about $8.25 trillion, an all-time high. That’s a sharp increase from the nearly $5 trillion recently held in these funds through 2022.
The atmosphere is a bit reminiscent of 2022. Risk of inflation is on the rise. Interest rates are rising aggressively. Both stocks and bonds are going down together. Gold is sharply off its highs since earlier this year. Every major asset class is declining, so cash seems like the only viable place to look for safety.
Will AI create the world’s first billionaire? Our team just released a report about a little-known company called an “inevitable monopoly” that provides critical technology that both Nvidia and Intel need. Continue »
The problem with moving all that cash into money market funds is that it’s missing out on stock market returns.
Image source: Getty Images.
Even if we go back to the beginning of 2022, which was just before 2022. Bear market And when the amount of cash held in money market funds was increasing, the total return for the S&P 500 would have been 42%. Total returns for Vanguard Federal Money Market Fund At the same time it was 18 percent.
Putting and keeping that money in the S&P 500 will, of course, require some flexibility. The index fell by more than 20% in 2022. Then about a year ago it fell again about 20%. Right now, it’s about 8% off its high. Yet despite all the downsides, ups and downs, and volatility, an investment in the S&P 500 will more than double the return on cash.
At the moment, the conditions giving rise to negative investor sentiment are correct. The market has pretty much written off any chance of a rate cut this year, traditionally a catalyst for a rally in stocks. The Iran conflict has pushed oil prices to their highest levels since 2022. The U.S. economy is slowing, and the labor market is struggling to generate any steady job growth. Those factors certainly justify a rebound in stock prices.
But the big driver in the short term is clearly the Iran conflict. As long as this continues without a resolution, investors are unlikely to bid up the stock price much.
It is in the long-term perspective that the bullish argument for buying the stock here makes more sense. Geopolitical conflicts are often short-term in nature. Market volatility increases as these events occur, only to see conditions return to normal after a conclusion is reached.
It is true that the current war with Iran may take weeks or months to end. But it can happen at any time. Once that happens and the cloud of uncertainty dissipates, odds are good we’ll see stocks and bonds rally in response. If investors can see the current situation as an opportunity to buy short and are willing to see what happens in the near future, this can be a real positive for their portfolio returns.
Perhaps the biggest reason moving to cash is risky is because of the behavior of the investors themselves.
What usually happens in market corrections is that investors react only after the stock price drops. At that point, they shift their portfolios to cash, thereby closing the losses already incurred. Only when conditions have improved, stock prices have probably already bounced back, and the coast seems clear if they move from cash to stocks.
In this situation, they have taken a loss and lost a benefit, so their return is hurt compared to if they had just done nothing.
An investor needs to be right twice to move cash in and out. First, they have to properly go out of stock while there is further shortage ahead (which is unknown). And second, they must have the discipline to get back into the stock when they originally got out. Most investors, even professionals, do not have the consistent ability to do this. And no one has the ability to see the future.
In short, moving into cash in reaction to rapidly volatile short-term conditions in the market is usually a mistake. Periodic market corrections are the entry price for investing in stocks in the first place. Often, the best thing investors can do is do nothing.
Before buying stocks in the S&P 500 index, consider this:
gave Motley Fool Stock Advisor The analysis team only indicated what they believed. 10 Best Stocks For investors to buy now… and the S&P 500 index was not one of them. 10 stocks that made the cut could generate monster returns in the coming years.
Consider when Netflix This list was created on December 17, 2004… If you invested $1,000 at the time of our recommendation, You will have $532,066.!* or when Nvidia This list was created on April 15, 2005… If you invested $1,000 at the time of our recommendation, You will have $1,087,496.!*
Now, that’s worth noting Stock Advisor The total average return is 926.% — market-crushing outperformance compared to 185% for the S&P 500. Don’t miss the latest top 10 list available with Stock Advisorand join an investment community built by individual investors for individual investors.
David Derking No positions in any of the stocks mentioned. The Motley Fool has no positions in any of the stocks mentioned. The Motley Fool has one Disclosure Policy.
