Investors seek safety in tech stocks, money-market funds

The first quarter in the markets was one for the record books.

At the start of the year, investors turned to speculative stocks, which were hurt when the Federal Reserve unexpectedly began raising interest rates in 2022. The season ended with madness from the banking system that you could not have imagined just a few weeks earlier.

All the while, the S&P 500 continued to climb, up 7% for the quarter.

The two biggest winners of the season? Technology shares and money market funds. Both came as refuges following the sudden collapse of Silicon Valley Bank.

“When you look at history, the strongest market back-and-forth has happened in a very short period of time,” said Saira Malik, Nuven’s chief investment officer.

Technology stocks initially rose on hopes that the Fed’s interest rate hike is coming to an end, and continued to fall during the selloff in bank stocks in March. The sector has outperformed in the past year as higher rates dim interest in growth companies that have the potential to generate windfall profits for many years into the future.

Nivea Corporation

, Facebook’s parent Meta Platforms Inc. And Tesla Inc.

All grew more than 68% in the first three months of the year to lead the market growth.

The technology-focused Nasdaq Composite Index rose 17 percent, outperforming the Dow Jones Industrial Average — made up mostly of old-economy stocks — by its widest margin since 2001.

Money market funds have enjoyed a similar renaissance — and like tech stocks, they’re largely a play on interest rates.

The average return on money market funds is 4.6%, according to Crain’s data, the highest since before the 2008 financial crisis and up from 0.02% in early 2022.

“When you consider that we’ve spent most of the last 14 years with a zero-interest policy … it’s a very attractive place to park cash,” said Nafees Smith, head of Vanguard’s taxable money markets group, which oversees more than $455 billion. in money-market fund assets.

The turmoil in the banking sector initially triggered a flight of deposits from small banks to large US banks. But uncertainty has left some customers with the Federal Deposit Insurance Corporation holding balances in the commercial banking system of more than $250,000.

Money-market funds offer a very attractive alternative and are often considered proxies for money because 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 total since April 2020, according to Refinitiv Lipper data as of Wednesday. This represents a change from the previous year, when the funds had approximately $46 billion in outflows.

Of course, money market funds will lose some interest if the Fed starts cutting interest rates later this year, traders in the market are predicting.

Last week, the central bank raised rates by another quarter of a percentage point, bringing the benchmark federal funds rate to 4.75% to 5%, the highest level since September 2007. A price increase may end the campaign sooner than expected.

With the Fed’s need for higher rates to control inflation, yields on money market funds will remain high for at least the next several months, said Torsten Slack, chief economist at Apollo Global Management..

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But “let’s be perfectly clear,” he said, “all of this will go away at some point.” For risk-averse investors, there are many things that are much cheaper today than they were six or 12 months ago.

The S&P 500 is trading at 17.9 times expected earnings over the next 12 months, down from 21.6 times at the start of 2022. That’s still slightly above the 10-year average of 17.3, according to FactSet data.

Some analysts point to dividend-payers, which were prominent last year, among the losers when the Fed ended its interest rate hike. Instead, they predict equity investors will continue to pile into tech stocks.

By one measure, investors have been pulling money out of funds that track dividend stocks at a faster rate since June 2018, according to Refinitive Leaper. Part of the reason why dividend stocks aren’t as attractive? The yield on the S&P 500 is 1.6%, and only 47 stocks in the index have a yield above the 4.6% average for money market funds, according to Dow Jones Market Data.

The S&P 500’s highest dividend index — made up of the S&P 500’s top 80 dividend-paying companies — is down 3 percent this year, including dividends, underperforming the broader market.

Tim Pagliara, CapeWealth’s chief investment officer, who manages $1.4 billion in assets, said the firm allocates 18% of client assets to short-term Treasurys but invests in high-dividend and value stocks. Inflation, which has moderated but is still high, is the reason it has stayed the way it is.

“People who keep everything in cash are going to pay a price in the long run because they’re going to lose after inflation,” Mr. Pagliara said. “You should invest your money in assets that will survive and thrive in times of inflation.”

Write to Vicky Ji Huang at

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