Can the Fed Save Our Portfolios From Coronavirus?
If you’ve been reading the financial news in recent days, you’ve almost certainly heard a lot about “the Fed.”
As the world’s most important central bank, the Federal Reserve is considered to be a backstop when bad things happen in the economy or financial markets.
And as an economic correspondent in Washington for a couple of decades, I came to understand the Fed pretty well (in fact, I met five Federal Reserve chairs in my time there). I even grew to admire its sound judgment and willingness to act.
The Fed’s ability to intervene in credit markets and change the cost of borrowing money is an extremely powerful tool, one that can foster economic activity and help prevent or mitigate a recession. It can also buck up financial markets when investors are feeling pessimistic.
But lately I’ve become a bit worried.
Last week the Fed’s interest rate setting committee held its first meeting of 2020 (the first of eight).
Prepare for the big news from that event: The Fed decided to do nothing.
Yet there are several major worries in financial markets right now. Chief among them is the spread of novel coronavirus, which has already infected some 40,000 people, and the impact it could have on economies.
The fact that the virus and its damage are concentrated in China makes it even worse. China, the world’s second-largest economy, is central to global commerce, manufacturing and trade.
And it may take China a long time to recover from the damage of this epidemic.
There will also be spillovers into other economies far from Asia. For example, Fiat Chrysler has already said it may have to shut down one of its European factories because of Chinese disruptions to its global supply chain.
So back to the Fed.
Is it ready to effectively counter any impact the virus might have on the U.S.?
I would argue that it isn’t. The Fed has kept its benchmark interest rate so low for so long that it’s just about out of ammunition to fight major downturns in the economy or the markets. The same goes for other central banks around the world.
And as investors, this is a situation we have absolutely no control over.
Luckily, there is something we can do.
If you divide your portfolio among large cap and small cap stocks, growth and value stocks, and domestic and foreign companies, you can protect your investments from coronavirus and other shocks to the system.
In fact, if you diversify correctly, you can get higher returns with less risk. That, writes Chief Investment Expert Alexander Green, is the holy grail of investing.
And here at Investment U, we have good investment ideas for all of these asset classes.
Enjoy your day,
About Matt Benjamin
Matt has worked as an editorial consultant to the International Monetary Fund, the World Bank, the Economist Intelligence Unit and other global macro-institutions. He wrote about markets and economics for U.S. News & World Report, Bloomberg News and Investor’s Business Daily, among other publications. He also worked for several years as head of political economy for a Financial Times-owned macroeconomic consulting firm, advising hedge funds around the world. Matt’s claim to fame is that he’s interviewed two U.S. presidents and has spoken with five Federal Reserve Chairs from Paul Volcker through Jerome Powell. Matt also served as The Oxford Club’s Editorial Director for two years.