Markets Go Berserk on Brexit; 1 Year CDs May Offer Some Cover

Markets Go Berserk on Brexit; 1 Year CDs May Offer Some Cover

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This may be a prudent time to shift money from cash to one-year CDs.

In the aftermath of the surprise Brexit vote, global equities fell off a cliff for two days, followed by a sharp and pronounced moved to new highs due to global central bank stimulus.  Still the UK faces a difficult economic future resulting from a long period of uncertainty, followed by a transitional period to a more restrictive environment where goods and capital will not be able to move as freely with its largest trading partners.  This will certainly lead to a recession (or depression) there, and consequently lower demand from 60 million English-speaking consumers of products and services produced by US corporations.  Europe, too, faces a hit of ½ of 1% to its GDP over the next three years, according to Mario Draghi.    To boot, whatever demand continues to come from the UK and Europe is already at a significantly lower price point as a result of a currency exchange rates that have moved sharply against the dollar.  US equity markets are priced for perfection and for strong growth, and those valuations may not be sustainable.

The same central bank action that caused a snap-back rally in US equities caused a rush to US Treasuries (where the 10 and 30 year bonds have hit all time new lows in yield) and gold (which is well off its high of several years ago, but up dramatically).  It is very possible that US rates will continue to decline over the short and even intermediate term.  (I now believe, like many, that the Fed cannot continue with its objective of normalizing US interest rates, as such action would cause still more strength in the dollar versus the Euro and British pound.)  Savings rates could actually decline.

Although not sexy and not where you want to have all – or even most – of your capital, 1-year certificates of deposit offer protection here.  BestCashCow’s list of CDs show that at least five online banks still offer 1-year CD rates at or above 1.25%.  Local bank and credit union rates may be higher (you can check those rates here).  While there may be an opportunity cost to locking up your money, the worst-case scenario of investing in a 1-year CD is that you get it back in a year.

Image: Time Life

Reviews

  • John

    July 07, 2016

    Sounds right!

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