Blackrock

The fixed deposit era is over! Cash is expected to underperform both assets (Brostock via Getty Images)

Interest rates have continued to rise this year, with money market funds receiving record inflows of $1.4 trillion in 2023 as investors look to earn about 5% interest on their cash. But BlackRock says the situation may be coming to an end.

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The market expects the Federal Reserve to announce on Wednesday Eastern Time that it will keep interest rates unchanged. The market is largely betting that the Fed’s next move will be to cut interest rates.

The Federal Reserve’s “pause period” between interest rate hike and rate cut cycles has likely begun. During the pause, investors should buy stocks rather than continue to collect interest from money market funds, according to research from Gargi Chaudhuri, head of investment strategy at Americas iShares at BlackRock.

“Now may be a good time for investors to put their cash out to invest,” Chaudhuri said on Yahoo Finance.

According to BlackRock’s analysis of the S&P 500’s trend, which is also reflected in this chart, the index rose the most during the period between when the Fed completed raising interest rates and began cutting interest rates. (BlackRock iShares Investment Strategy) (BlackRock iShares Investment Strategy)

Chaudhuri analyzed the S&P 500’s returns during each Fed rate hike cycle since 1995 in the six months before the last hike, the pause period, and the six months after the first rate cut. The analysis shows that among the three, the stock market has the highest average annual return during the pause period.

“Whether you’re in the bond market or you’re in the stock market, investing during this pause is very important,” Chaudhuri said. “This is a bit urgent because we think that by the second half of 2024, the Fed will start cutting interest rates.”

Chaudhuri believes that current bond interest rates are “unbelievable” and there are opportunities in the fixed income sector. When it comes to stocks, she recommends high-quality stocks with low leverage, stable earnings growth, and healthy balance sheets.

Cox’s research shows that stocks have significantly outperformed cash in five of the past eight economic cycles. (eToro, Bloomberg)

eToro US investment analyst Callie Cox believed in a blog post last month that as interest rates rise and many people feel uneasy about economic development, it is understandable that funds will flow into the currency market in 2023.

But “investing cash doesn’t mean leaving it under your bed forever.” That’s an important caveat, Cox says.

While less risky, cash will miss out on rising stock markets over the long term. Cox’s research shows that stocks have significantly outperformed cash in five of the past eight economic cycles (each ending when it officially entered a recession, the last of which was 2020).

2023-12-13 05:17:54
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