stocks vs. cash

At present, cash yields zero.  Investors who hold cash receive safeguarding of their deposits but no financial return.

Stocks carry no guarantees against loss.  At present, the S&P 500 yields about 2%.  One might reasonably estimate that yearly capital gains will average, say, 6% over longer periods of time.

A guaranteed zero vs. a possible +8% per year.  To my mind, not exactly a compelling case for cash.

In theory, and in practice during the 1970s- 1980s, investors have shifted large amounts of money from stocks to cash when the returns on cash have been high enough.

Hence, the thought-experiment question:  how high would short-term interest rates have to be to trigger serious reallocation away from stocks in favor of cash?

My answer:  I don’t know for sure.

In my experience, during periods of much higher interest rates than are the norm today, when short rates would get above half of the expected return (of about +10% per year) on stocks, then money would begin to shift away from equities.  That flow would accelerate–causing stocks to begin to stall–if short rates got to 60% of the expected return on stocks.

 

My conclusion is that short rates would have to get well above 3% in today’s world before reallocation becomes a worry.

If so, a rising Fed Funds rate is something to keep an eye on but not a serious current threat to stocks, in my view.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: