Here’s more about what a money market account is, why it’s better for short-term funds, and how equity funds could still play a part in your strategy despite the recession-hesitant bear market.
A recession quickly becoming a matter of when and not if.
As Fed Chair Jerome Powell announces interest rate hikes and the jobs and housing markets are cooling, a recession seems to be turning into a closer threat. Gross domestic product (GDP) declines have been occurring for two straight quarters already, but recent definition changes of a recession mean other factors (namely strong corporate profits and a still-low unemployment rate) are keeping things at bay.
Ernst & Young chief economist Gregory Daco told reporter Ellen Chang, “The persistent drag from higher inflation, a decidedly more hawkish Fed, tighter financial conditions and a deteriorating global economic backdrop will continue to weigh on housing activity, consumer spending, business investment and trade.”
What is a money market account?
A money market fund or money market account is generally a secure place to keep your money liquid. It’s similar to a savings account in that it yields interest which may fluctuate along with Fed rates.
Money market accounts are typically FDIC or NCUA (National Credit Union Administration) insured.
Money market funds are safe for capital needed in the short term.
Money market accounts are safe places to store capital you may need to access in the short term (similar to an emergency fund in a savings account, though you may have a separate money market account for short-term consistent expenses).
The problem with storing too much money in a money market fund has to do with inflation. Despite a potential looming recession, inflation is at a 40-year high and could continue to impact Americans. If you aren't earning enough interest on your capital to combat inflation (which you aren’t without more lucrative investments), you’re actually losing money.
Here's what you should know about money market accounts in economic downturns.
If you're looking to open a new money market account or are considering switching from your existing account, consider these tips:
How much access do you have to the account? Make sure it isn't too easy to spend so you can actually save what you need for those short-term expenses.
Is the rate favorable or can you get a better one with a high-yield savings account?
Is there a minimum balance you should be aware of before opening or maintaining an account?
Equity funds are still okay for long-term holdings.
Buy-and-hold strategies with long-term outlooks may still benefit from equity funds, even if the risk level of the portfolio shifts. For example, you may switch out consumer discretionary funds for consumer staples, which typically fare better in a recession. Similarly, large-cap funds may perform better than those tracking small-cap businesses.
Ultimately, a diversified portfolio wins, but a money market account is a safe place for a portion of your capital you want to keep liquid.