Stock Market Effect on Money Market Savings Accounts
Money market savings accounts are bank products that cater to people desiring to earn interest on liquid funds. Funds in money market savings accounts are protected by the Federal Depository Insurance Corp. The New York Stock Exchange trades stocks and bonds that are not FDIC-insured. The performance of the NYSE has no official connection with money market savings accounts, but its performance affects the health of the economy, which affects FDIC-protected interest-bearing accounts.
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Stock Market History
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In 1792, New York stock brokers signed the Buttonwood agreement, which signaled the creation of the New York Stock Exchange. The first securities traded were government bonds and bank stocks, but by 1815 insurance stocks were also trading. In 1896 the NYSE first published the Dow Jones industrial average index of stocks. On "Black Tuesday" 1929, 16 million trades occurred as the market crashed and the Great Depression began. Other major stock market down years occurred in 1987, 2001 and 2008.
Money Market Savings Account Features
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Bank-operated money market savings accounts are covered by FDIC insurance up to a maximum of $250,000 per account owner, per bank. The accounts pay higher interest rates than savings accounts on balances above $10,000. Regulation D limits withdrawals from money market accounts to six per month. Account owners can make up to three of the withdrawals with checks, debit card point of sale purchases or automated clearing house transactions. The accounts usually have tiered interest rates.
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Stock Market Effects
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Economists use the stock market as an indicator of the economic state of the U.S. During down markets, investors sell shares and withdraw from the market, causing share prices to fall further. Banks tighten lending in response to lack of liquidity in the markets, and consumers reduce spending due to lack of available credit. The Federal Reserve board usually lower interest rates to encourage lending and spur a recovery.
Considerations
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Banks make money from writing loans and must keep deposits on hand to balance the money they lend. When lending declines due to recession, banks have less need of deposits and pay minimal rates to savers. Banks also borrow money from the Federal Reserve and other banks, so when intrabank lending rates are low, consumer deposit rates have to fall to remain competitive. Money markets are liquid and, as such, always have lower interest rates than illiquid products like CDs.
Warning
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Low rates on money market savings accounts and other FDIC-insured products negatively affect savers. The Federal Reserve keeps interest rates low until the stock market has rebounded. Market recoveries are usually slow and, to prevent false dawns, the Fed typically waits until other economic indicators support the market upswing before raising rates. Conservative investors wary of buying stocks cannot entirely escape the effect of down years in the market.
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