Get insights into the current state of the stock markets and bond markets. Discover if the potential rewards outweigh the risks in today’s economy.
For the 8th consecutive time they’ve met, the Federal Reserve raised interest rates this week, albeit this one was at a lower rate of 0.25% compared to increases as much as 0.50% to 0.75% at a time last year. While this is not good news for borrowers, it is for savers.
As the Fed raises interest rates, financial institutions raise the interest rates they pay their depositors.
For example, Varo Bank currently pays a 5% APY (annual percentage yield) on the first $5,000 deposited in a savings account. Like any name-brand banks you may be familiar with, Varo depositors are FDIC-insured up to $250,000 per account.
If you prefer a high-yield savings account, Atlantic Federal Credit Union offers a 4.20% APY, and their savings accounts are also FDIC insured.
Comparing high-yield savings accounts with the stock market
On paper, the stock market has outperformed high-yield savings accounts at the beginning of this year. In January 2023, the S&P rose 6.1%, and the tech-heavy Nasdaq was up 10.2%.
While January got the year off to a good start, February is questionable. There have been more layoffs in the first few days of the month, and Apple, Amazon, and Alphabet, the parent company of Google, have all reported disappointing earnings for the 4th quarter of 2022. They have also lowered their projected revenue estimates for 2023.
Rising interest rates, layoffs, and companies not hitting their earnings targets, coupled with the looming financial meltdown that would be caused by the Federal debt ceiling not being raised by Congress within 3-4 months, substantially increases the odds of a recession.
If you have a 3-5 year time horizon before you need the money you have invested in the stock market, leaving it there, and even putting more in through regular monthly investing (dollar-cost averaging) may be the prudent thing to do.
If it will be necessary to make withdrawals from your savings or retirement account in the next 2-3 years, or you are just a very cautious investor, a 4-5% return on your savings or money market account might be the right move for you.
Your situation is unique, so decide which is better for you in the short and long term.
Don’t decide based on what the financial news media is saying or what well-meaning friends or family are telling you to do.
It pays to do your own research or meet with a professional financial advisor, such as a Certified Financial Planner.
But do it soon. This is a volatile economy, and we could be in for a bumpy ride in 2023.