Fed Slashes Rates as Coronavirus Spreads! Here’s What to Do ...

One of the biggest issues with the coronavirus outbreak and its effects on the market is that, unlike past crises, this one started as a medical issue rather than a financial one.

I’m going to defer to those with medical expertise to weigh in on the pandemic in the days and weeks ahead. My job instead is to attempt to evaluate crises like this one from an INVESTOR standpoint.

This means I’ll be tackling two important questions:

1) What do the latest developments mean to your financial well-being?

2) How should you react to the wild volatility we’re seeing out there?

Let’s start by looking in more detail at the market action ...

From its high on Feb. 12 through its intraday low on Feb. 28, the Dow plunged more than 4,800 points. S&P 500 futures tanked 16% from their high on Feb. 20 through their intraday low on Feb. 28.

Most investors categorize a 10% drop as correction. They consider a 20% drop to be a full-blown bear market.

What’s shocking is that last week’s action took us from all-time highs to nearly a bear market in just a few days — making it one of the fastest drops in history!

The last week of February alone was the worst week for the Dow and S&P since October 2008, during the midst of the Great Financial Crisis. Stocks shed an estimated $3.6 TRILLION in value in just a few days.

Now, there’s been a pattern in policymakers’ response to such events since the Great Financial Crisis. And this pattern has been clear:

First, you get the outbreak of a crisis.

Second, you get a panicked market response.

Third, you get the Fed’s desperate REACTION to the panic.

We saw it during the “PIIGS” debt crisis in Europe in 2010 ... We saw it during the 2011 debt ceiling crisis in the United States ... And now we’re seeing it as part of today’s spreading coronavirus crisis worldwide.

Yesterday, the Fed completed the pattern and took the third step: It cut its benchmark short-term interest rate target range by 50 basis points (0.5 percentage points) to 1%-to-1.25%.

This was the first inter-meeting move since 2008 during the financial crisis (The Fed wasn’t scheduled to gather again until March 17-18).

The rapid response was due to the Fed and other policymakers trying to combat fear and uncertainty in markets. After all, no one knows the full economic impact of the virus yet, and it continues to spread globally.

Does the Fed’s surprise rate cut change the equation? I’m highly skeptical and I’ll tell you why ...

• It doesn’t open factories that have been shut down anytime soon.

• It doesn’t create a vaccine for the coronavirus.

• It likely will not increase borrowing. Interest rates were already at record lows. And yet, borrowing was beginning to slump nonetheless. I doubt an extra 50 bps in cuts will change that.

Look, I’m not going to pretend I know what’s going to happen in the very short term. Wild swings up AND down are likely over the next few days. The best one-day market gains in stocks tend to cluster around the worst one-day drops. That’s volatility for you.

But in the LONGER TERM, it’s clear to me policymakers are misdiagnosing the problem. They’re continuing to focus intently on the acute, short-term virus threat ... but failing to appreciate the chronic, longer-term recession threat that has been growing for several quarters now.

I’ve mentioned a few times now that the markets have been lagging since Q1 2018. Now, COVID-19 is exacerbating trends already in place.

A “Safe Money” approach is your best bet to weather this storm. That means carrying higher levels of cash than you did pre-Q1 2018 ... favoring U.S. Treasuries over junky, high-risk bonds ... allocating more money to precious metals and related equities ... and emphasizing defensive, recession-resistant stocks with dividend yield support.

Remember, in a crisis, performing even relatively well is the name of the game.

If you’re a subscriber to my Safe Money Report, then you’ve already received several actionable Flash Alerts with specific moves to protect your portfolio from this volatility. You even had the opportunity to grab a few rounds of gains despite the volatility. Nice!

If you haven’t joined Safe Money yet, all you have to do is click here or call my team at 1-877-934-7778.

And if you don’t feel ready to do that, I would strongly recommend you:

1) View the free 10-minute video about the virus that our founder Martin Weiss put together. It discusses the impacts COVID-19 could have on your investments and the steps you should take in response in greater detail. You can access the video here.

2) Make sure you continue to adopt a “Safe Money” approach to the markets.

Finally, if last week’s market didn’t convince you, now’s the time to avoid “garbage stocks” with high economic risk, lousy Weiss Ratings, fly-by-night business plans plus massive losses and other acute vulnerabilities.

They were the absolute worst stocks to own in this late-cycle environment. They’re even more dangerous to your wealth now.

Until next time,

Mike Larson