Should you hold cash or invest in the market?
‘Explosive Returns’—Parabolic $200 Billion Crypto Price Prediction Primes Huge Bitcoin And Ethereum EarthquakeWhen interest rates change, they don't often do so uniformly across the curve. The current rate hike cycle illustrates this quite well, given the speed. The federal funds rate is the shortest of short-term interest rates. It's the reference interest rate for overnight borrowing between financial institutions like banks.
In the chart above, it's worth noting that the 1-month T-bill rate is being distorted by the debt ceiling talks.To help investors compare cash and equivalents, interest rates are usually in annualized terms. For example, the annual percentage yield in a savings account, say 4.5%, assumes the current interest rate stays the same for a year and future interest payments are added to the balance and compounded.
So while the savings account or T-bill might look more attractive than a 1-year Treasury initially, remember, only the 1-year Treasury yield is locked in . If/when interest rates drop, interest rates in savings accounts will fall too, along with 1-month bills.If the investor can no longer reinvest a 1-month bill at the same rate, there will eventually be a crossover point when locking in a lower stated yield would be better on comparison.
Of course, in bouts of market volatility over shorter periods of time, cash can certainly outperform stocks. Since the beginning of 2022, cash has outperformed the S&P 500 by about 14% on a cumulative total return basis. But again, if history is a guide, this relationship will reverse and we've already seen it to start the year.
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