What stocks to invest in
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.
– What stocks to invest in