Americans are pouring record amounts of money into savings even though interest rates on those accounts are at historic lows, new federal data show, a sign that ordinary people are missing out on a booming stock market and recovering real estate sector.
Researchers at the Federal Reserve say total savings climbed nearly 5 percent to $6.9 trillion in the spring, the highest level ever recorded since 1945.
At the same time, other data show that Americans are fleeing the stock market and avoiding the purchase of new homes.
The pattern suggests that Americans, wounded by the financial crisis and scared by an uncertain job market, dont want to take any risks with their money at the exact moment when the government is encouraging risk-taking.
The Fed recently announced an unprecedented plan to pump hundreds of billions of dollars into the financial markets to reduce interest rates, which should have the effect of boosting stock prices and making it cheaper to buy homes.
But if consumers remain on the sidelines, it means the policies may benefit only the most well off and secure – and fail to help both average Americans and the broader economy.
People have lost their appetite for risk, said Karen Dynan, co-director of the economic studies program at the Brookings Institution. Theyve been burned by the stock market. Theyve suffered through capital losses on their homes. And so theyre hunkering down in what they view as the safest place to store money.
Households began squirreling away cash in the midst of the recession.
A lot of families have drained whatever savings they had because of hard times – job losses or low wage growth – and are trying to replenish their reserves, Dynan said.
Nearly half of Americans still do not have enough savings to cover three months of expenses, according to a recent Bankrate.com study.
Even those on solid financial footing are wary about the stability of the economy and unwilling to subject themselves to market risks, said Greg McBride, senior financial analyst for Bankrate. They know they need to invest some portion of their income to create wealth, but are not shoveling money into the stock market in spite of the possibility of higher returns.
Some say the wild market swings of the past few years have been too unnerving for average investors, and the recent spate of technical glitches certainly does not help.Others peg the outflow from stocks on shifting investment strategies as cautious Americans turn to bonds.
But only holding on to safe bets could prove detrimental to investors in the long run, some analyst say. The rate on the 10-year Treasury bond has been well under 2 percent, and banks typically offer less than 1 percent in interest on savings accounts, not nearly enough to keep up with inflation, let alone build wealth for a childs college education or retirement.
These so-called safe investments like bonds and cash arent nearly so safe when you view them through the lens of loss buying power due to inflation, McBride said. A lot of people are taking a lot more risk in conservative investments than they realize.
Charles Jones, professor of finance and economics at Columbia University, said people are extrapolating too much from the recent past in making investment decisions.
Were in a very low interest rate environment, so you have to think every asset class is likely to have low returns for the next few years, he said. Stocks have historically outperformed, and theyre going to continue to outperform. Real estate has come to a level where it is similarly attractive.
But who could really blame Americans for their trepidation?
They watched what little wealth they created through homeownership or retirement plans evaporate four years ago.
That kind of devastation is enough to sour anyone on investing, or at least make them more conservative in their choices.
A recent survey of investors by money manager BlackRock found just 11 percent were willing to take on risk in the face of market uncertainty. Nearly half of investors were holding fast to their current portfolio allocations because they were unsure of where to deploy their money.
Investors yanked some $5.1 billion alone in the week ending Sept. 19, while plowing around $8 billion into the bond funds – days after the Fed announced its stimulus plan, according to the Investment Company Institute, a trade group for the mutual fund industry.
Only about 20 percent of Americans invest in stocks, the groups research shows. Even for those who have money, investing presents tough choices. Steve Love, an individual investor in Los Angeles, said he prefers real estate over stocks even though banks can be reluctant to lend to small-time players.
With a house, it has a value in that someone has to live in it and I can rent it out for so much money or sell it for so much money, said Love, 61. What scares me about the stock market is that you have these little pieces of paper that say I own so many stock, and then you run into an Enron and it turns out to be worthless.