The first quarter of 2023 has been a volatile time for investors, with unexpected market movements and unpredictable events that have led to shifts in investment strategies. However, despite the turbulence, two investment options have emerged as havens: technology shares and money-market funds.
As interest rates rise, the appeal of growth companies that have the potential for generating windfall profits many years in the future diminishes. However, with the Federal Reserve potentially nearing the end of its interest-rate campaign, investors have turned to technology stocks, particularly software and semiconductor companies, which have initially soared and continued climbing during March's bank stock selloff. Companies such as Nvidia Corp., Facebook parent Meta Platforms Inc., and Tesla Inc. have surged more than 68% in the first three months of the year to lead the market's advance. The tech-focused Nasdaq Composite Index has also outperformed the Dow Jones Industrial Average by the widest margin since 2001.
Money-market funds have also seen a resurgence as they are largely a play on interest rates, which have risen to their highest level since before the 2008 financial crisis. Money-market funds offer an attractive place to park cash, given that they invest in highly liquid debt securities. Investors have added a net $336 billion to U.S. money-market funds this year, including $283 billion in March alone, the highest monthly sum since April 2020, according to Refinitiv Lipper data through Wednesday.
However, money-market funds may lose their allure if the Federal Reserve begins cutting interest rates later this year, as predicted by traders in the derivatives market. Last week, the central bank raised rates by another quarter-percentage-point, bringing the benchmark federal-funds rate to 4.75% to 5%. The Fed also signaled, however, that the banking-system turmoil might end its rate-rise campaign sooner than expected. Yields on money-market funds will remain elevated for at least the next several months as the Fed needs to keep rates high to get inflation under control.
For risk-willing investors, there are still opportunities to invest in assets that are cheaper today than where they were six or 12 months ago. The S&P 500 is trading at 17.9 times its expected earnings over the next 12 months, down from 21.6 times earnings at the start of 2022. However, dividend-paying stocks, which were popular havens last year, are among the biggest losers if the Federal Reserve pauses its interest-rate campaign. The dividend yield on the S&P 500 is 1.6%, and just 47 stocks in the index have a yield above the 4.6% average on money-market funds, according to Dow Jones Market Data. The S&P 500 High Dividend Index has also fallen 3% including dividends this year, underperforming the broader market.
Inflation remains a concern, but investors like Tim Pagliara, chief investment officer at CapWealth, which manages $1.4 billion in assets, recommend staying the course by investing in assets that will outperform inflation in the long run. While cash may be a safe option in the short term, it may not be a profitable investment over time. Therefore, investors should consider diversifying their portfolios with assets that can withstand volatility and provide returns in the long run.
