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Investors Fear Equities and Hold Cash Despite Low Savings Rates

Has the bull market run in equities over the past 5 years made you nervous about staying invested in stocks? If so, you're not alone - investors have been hoarding cash in greater numbers since 2013, despite current low savings rates.  The average annual gain of the S&P 500 over the past 5 years has been 18.89 percent, yielding over a 100% gain, so comes as no surprise that investors are nervous about holding stocks these days.

Whether or not equities are in a late stage bull market run is debatable but with the stock market gains over the past 5 years, now is a good time to take some money out of stocks. If you're placing that money in good old fashion FDIC insured bank accounts you will probably be shocked at how low interest rates are these days.




Average savings rates and money market rates are dismal right now. In the most recent FDIC national average rate survey, savings rates are averaging 0.06 percent. Money market rates are not much higher, averaging only 0.08 percent. 1 year bank CD rates are slightly higher, averaging 0.20 percent.

Those rates are just average rates but you can find rates much higher than the averages. Online banks are offering interest rates much higher than traditional brick and mortar banks.  For example, one of the largest traditional brick and mortar banks, Bank of America, is offering current savings rates at a measly 0.01 percent. An online bank, Synchrony Bank (formerly GE Capital Retail Bank) is offering savings rates at 0.95 percent.

State Street released a report showing investors the world over with a net worth of $250,000 to $1,000,000 are hoarding cash in greater numbers. Cash allocations have increased over the past two years with the global average increasing to 40 percent in 2014, up from 31 percent in 2012.  In the United States, the percentage has increased to 36 percent in 2014, up from 26 percent in 2012.

If you are holding more cash and placing those funds in deposit accounts, the good news is deposit rates will be moving higher in the coming years. Exactly when interest rates move higher and how high rates go depends on what the Federal Reserve does. The lower the unemployment rate falls and the higher the annual inflation rate is will determine how high the Fed increases the fed funds rate.

Since banks tie their deposit rates to the fed funds rate, when the fed funds rate moves higher, so do bank rates. The best case scenario for deposit rates over the next few years will be savings rates and money market rates in the 3 percent to 4 percent range. The highest rates for 1 year certificates of deposit will probably be just above 4.00 percent.
 
Author: Brian McKay
July 2nd, 2014