Today's predictable increase of interest rates by a quarter point was a real snoozer. Stocks are rallying. Who cares? Become a Complete Fool
Hardly anybody pays attention any more to the yield on a boring money market fund. Most of them have been below 1% for years, it seems.
I looked up the current yield on Vanguard's Prime Money Market Fund. It is 1.84% and heading north. Soon will be over 2%.
Still a pathetic yield, but I have heard a lot of people over the last few years use the sub 1% money market yield as their rationale for buying a stock that offered the hope of appreciation. Stocks may pose risks, they would say, but I am getting nothing in a money market account, so I have "no choice."
In 25 basis point increments, Greenspan is giving them a little more choice each Fed meeting. The market may be rocketing to new highs, and investment bankers again finding happiness doing M&A deals with shares as currency, but with each uptick in rates the gravitational pull increases a notch.
I don't know that a 2% money market yield is going to pull tons of money out of equities, but it is startling to look at what the average yield on the Vanguard Prime Money Market Fund was not all that many years ago. In 2001, it was 4.17%. In 2000, 6.29%.
Lots of people are straining to find stocks today that pay 2 or 3% dividends. It is the "tax smart" thing to do now that dividends get preferential tax treatment over interest income. But if boring old money market accounts go back to paying 2 or 3%, and those dividend paying stocks--God forbid--were suddenly to drop 10% (four years worth of dividend income), things could get very interesting.
When money market rates drop from 6% to 1% in four years, the normal laws of physics that govern the stock market are suspended. The liquidity rushing into equities is like a massive tidal wave. Add to that incredible force the aforementioned change in tax law, and the norms get even more distorted.
Greenspan basically has stopped the movie projector and pushed the button that says, "reverse." Judging by the new market highs, the average investor does not seem very worried about how this movie might play in reverse. Greenspan, after all, is "the Maestro." He will monitor the situation and take care of us.
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Today's predictable increase of interest rates by a quarter point was a real snoozer. Stocks are rallying. Who cares?
Become a Complete Fool