2023 has started out with a bang for the U.S. stock market. After a disastrous 2022, stocks are trying to recoup their losses but they are finding some strong competition from other asset classes, particularly bonds and money market funds.
With interest rates back up to a much more competitive level than what we have seen in the past 15 years or so, there are now legitimate places to invest besides the U.S. stock market and get a decent rate of return.
Let’s take a look at the flow of money going into and coming out of mutual funds, exchange-traded funds (ETFs), and money market funds since the beginning of 2023. The chart below shows the net flows of money for 4 different investment categories: U.S. stocks, Foreign stocks, Bond funds, and Money market funds.
As you can see, investors have been pulling money out of U.S. stocks and moving into foreign stocks, bonds, and savings (money market funds). Who can blame them? You can park your money in a money market account currently paying over 3% interest, or a 1-year CD paying almost 4.5%. That’s not bad for a risk-free investment.
Risk-averse investors have been waiting for rates like these for a good part of this century so this is welcome news for those that need investment income without risking their principal.
Now, if you’re an investor that goes against the herd, also known as a contrarian investor, you know this chart also signals a good time to get into the stock market. I definitely want to revisit this chart at the end of the year if stocks continue to go up, to see if the money flows change significantly or not.
The good news is that you don’t have to be all stocks or all cash. You can enjoy the best of both worlds by allocating your money according to your risk tolerance and time horizon.
Please comment or send an email if you have any questions. Thanks!
Joe Baker, CFP®
Baker Asset Management, LLC
