The Fed Can’t Cure Coronavirus — But It CAN Help You Feel Better
“Dad, I still don’t feel good. So can I have a doughnut?”
My little buddy Caleb had a bad cold last week and missed several days of school. No, I’m pretty sure it wasn’t coronavirus. But he was pretty droopy for quite some time.
“Buddy, I’m sorry you’re not feeling well. But more sugar isn’t going to help your cold”
Caleb didn’t even skip a beat…
“Dad, I know the doughnut won’t make the cold go away… But it will definitely help me FEEL better!”
And you know what? In his little 7-year-old mind, feeling that sugar rush is just as good as recovering from the cold!
This week, I had to laugh, because traders have been acting just like Caleb when it comes to the coronavirus. And yesterday, the Fed gave in and offered this sick market a doughnut.
Let’s take a look at how this affects our investments, and what you should do with your retirement fund.
“The Fed Can’t Cure Coronavirus”
I’ve probably heard that statement a dozen times over the past couple of days.
Traders, investors and the media have been debating what the Fed should do in reaction to the coronavirus. After all, we just experienced the fastest “correction” from market highs in history!
Fearful investors have been selling stocks, believing that the coronavirus will cripple the global economy and cause corporate profits to drop.
And as the market fell, calls for the Fed to intervene became louder.
Yesterday, Fed Chairman Jerome Powell heeded those calls, implementing an emergency rate cut of 50 basis points (or half of a percentage point).
You know, similar to being a dad, being a Fed Chairman may be one of the toughest jobs ever. You’re criticized no matter what move you make.
Skeptics have said that the Fed was wrong to step in and cut interest rates so quickly.
“The Fed can’t cure coronavirus. And cutting rates isn’t going to solve the health crisis or the economic fallout.”
That may be true. By cutting interest rates, the Fed has done nothing to keep workers in factories, to encourage people to go to concerts or public events, or to prevent companies from laying off employees.
And these are major concerns as more coronavirus cases are showing up in the U.S..
But even though the Fed can’t directly affect the spread of the virus or actions that people and businesses take, the emergency rate will still have an effect.
Just like Caleb felt better after negotiating with me (yes, he did get a treat, but not a sugary doughnut), consumers and businesses and investors will feel better thanks to this rate cut.
The Fed’s rate cut will keep mortgage rates lower (which will encourage more homeowners to refinance with a lower home payment). Lower rates will make it easier for businesses to borrow cash to get through any temporary weakness related to coronavirus. And lower rates will naturally drive investors to buy dividend stocks — which now pay much higher yields than you can get from bonds or traditional savings accounts.
In short, the Fed’s rate cut will make it easier for businesses and individuals to get access to the cash they need to get through this period. And that’s the “liquidity” you’ve probably been hearing about on the news.
Put This Gift From the Fed In Your Retirement Fund
So how do you take this gift from the Fed and put it to work for your retirement wealth?
On Monday, I told you about the income opportunity my kids are most excited about.
Using low interest rates to get a cheap mortgage on a vacation rental property is a great way to capitalize on the current environment. I like this idea because it helps you grow wealth and income… and it helps you spend more time with family!
Remember, money is just a tool. But if it helps you spend more time on the things that matter, it’s a tool used wisely! You can read Monday’s Daily Edge piece here.
Another more traditional way to play this interest rate cut is to invest in Real Estate Investment Trusts — or REITS.
A REIT trades on the market just like any other stock. But it has some distinct advantages.
REITs are exempt from paying corporate taxes, so profits are able to accumulate more quickly.
In exchange for this special treatment, REITs are required to pay investors the majority of their operating income through dividend-like payments called distributions.
This is a perfect environment for REITS for two very important reasons.
First, low interest rates will allow these companies to borrow more cheaply, and use that cash to buy more real estate. And the more real estate that is held, the more cash flow can be generated. That means you’ll receive more as an investor as these businesses grow!
Second, with lower interest rates, investors will be looking for stocks that pay healthy dividends. Now that the Fed is cutting rates, I expect a lot more capital to flow into high yield stocks like REITs.
So if you act quickly, you can invest ahead of that flow of capital. And that means your REIT shares should increase in price — on top of the lucrative payments you’ll be receiving.
It’s a win-win situation… Like getting a doughnut, AND recovering from your cold!
Here’s to growing and protecting your wealth!