How Does Money Market Work in a Recession?

Money markets provide short-term safety during uncertain times.

Money markets provide short-term safety during uncertain times.

A recession results from a significant decline in economic activity that lasts more than a few months. Two or more consecutive quarters of negative growth for the gross domestic product, or GDP, indicates a recession, but high unemployment rates or a drop in consumer confidence and spending levels also may contribute to a recession. In other words, the economy goes kaput. Money markets provide temporary safety during a recession with short-term, low-risk securities.

Cash Reserves

Stashing your cash in money market funds protects your money in a recession, but only as a short-term remedy and not for long-term growth. Money market funds provide liquidity for cash reserves to boost your portfolio during uncertain economic periods. The returns are low, but money markets help balance your investments if the stock market takes a hit from a recession. Money markets include government securities, certificates of deposit, Treasury bills and other highly liquid securities.

Market and Mutual Funds

Money market funds assist small investors with initial investments that range between $500 and $5,000. You can buy money market funds from brokerage firms or mutual fund companies. Many mutual funds include money market funds. Mutual funds contain a wide variety of stocks, bonds and other securities that provide low risk, usually for long-term investing. The diversity within mutual fund investments keeps the overall funds safe when higher-risk stocks or a particular sector of the market perform poorly.

Money Market Accounts

Money market funds differ from money market accounts offered by banks for interest-earning savings accounts, which investors also use as safe havens in anticipation of or during a recession. Money market accounts have a high rate of interest with a higher minimum balance ranging from $1,000 to $25,000. Unlike money market funds, money market accounts are FDIC-insured.

Money Withdrawals

Money market funds offer simplified withdrawal methods in which you can write checks to take out money or receive money transfers. You can usually receive payment within seven days. This can make money market funds ideal during bad economic periods to keep your money safe for the short term and to take out money in times of an emergency.

Review Funds

Despite the secure features of a money market fund, do your research when buying funds or seek professional advice. Read information from the company’s prospectus, or go online for the fund’s website. You can find the fund's current price and annual performance. If you already have investments managed by a financial adviser, chances are you have money market funds in your portfolio. Consider moving more money into money market funds for the short term during a recession. As with investing during any period, include money market funds, but keep your overall investments diversified.


About the Author

Jerry Shaw writes for Spice Marketing and LinkBlaze Marketing. His articles have appeared in Gannett and American Media Inc. publications. He is the author of "The Complete Guide to Trust and Estate Management" from Atlantic Publishing.

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