If Americans are so worried about Inflation then why are they putting their money in Money Markets.?

Question

The DOW is down nearly 1,000 point, partially over inflation concerns (at least that's the way the media puts it). CNN ran an article that said in the month of May, a record amount of money went into money markets. The market averages 10% and a money market around 4%?

In the stock market you have dollars, and in a money market you have dollars. Both of which are worth less come inflation. Can someone explain the logic of this too me?

Answer 1

The stock market averages about 10% over about 50 years. Some years it goes up 25%. Some years it goes down 15%. In a short term environment, say the last 2 months, the market is down about 7%. Money markets on the other hand, are at about 4% right now. If you sold 2 months ago, you'd have missed the 7% drop and earned about 0.4% interest so you'd be up over 7% compared to someone who hung in with the stock market. Of course this assumes you were psychic two months ago and sold out.

If you are a long-term investor and not a short-term speculator, you wouldn't be too worried about a 7% drop because you know it will likely recover soon. On the other hand, a good long-term investor will also try to minimize risk and will keep some money in shorter term accounts like money market accounts all the time anyway.

Answer 2

With a money market, you generally don't have repayment and credit risk. While it may be true that the market averages 10% a year, that's over the long term and people don't always want that uncertainty short term. So they may reason that 4% per year (after all the interest rate risk is at best the 4%, right?) is better than the unpredictable rate of return in the stock market. No one said that investing one's cash had to be logically sound, as you can see from your question.

Answer 3

I wish I really had a better understanding of all this. I think people pull their money out of stocks because of inflation fears, but also because the market has taken something of a nose dive. Once the panic sets in, nothing can really stop the mob mentality.

When inflation comes, they have to raise interest rates. When stocks fall, they like to lower interest rates. The Fed will have some fun this summer!

To answer your question, I think investors like to buy things that are on sale. With stocks heading back down the crapper, and interest rates rising, money markets are on sale, and are safe for the short term. Bonds don't look good because you won't be able to sell your relatively low-rate bond once rates climb...which they WILL.

Answer 4

Inflation tends to drive interest rates up and increase risk for companies because they can be potentially negatively impacted by inflation. This narrows the spread between rates people can earn in a relatively risky stock and relatively safe money market account, making the risk adjusted potential return of the money market account look more attractive than a stock.

Answer 5

because they don't want to bother with diy daily trading which is unnecessary stressfull for them.
also it's part of don't put all your money at one basket.
there is another choice to put your saving for interest of more than 4%, they are
citibank internet bank now offer 4.75% interest, emigrant bank 4.65%, ingdirect ?%.
i invest in stock, but fail to make money, instead i loose 13% (this 13% lost is occur during this 2 weeks alone!). it's a lot of emotion involved. i feel like wasting my time and effort for doing it. but it's not a lot of money, so i just continue to do it as part of self education in finance.
my best investment is my house.

Answer 6

Americans love to spend money.