Mutual Fund Buzz: What This Week Means for Your Money

Midterms are today, and the Federal Reserve speaks tomorrow.

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Experts say this could be one of the most important weeks of the year. It kicks out with midterm elections today, continues with the Fed's much anticipated quantitative easing announcement tomorrow, and ends with Friday's jobs report for the month of October. A recent post by Index Universe walks investors through what to expect this week. J.D. Steinhilber writes that the markets have rallied because the Fed has hinted that it will initiate another round of quantitative easing, which will probably involve buying long-term treasury bonds to push interest rates lower and spur more lending to boost the economy. He cautions that the Fed announcement could actually cause a sell-off in the markets. "Given that expectations of QE2 on a robust scale (i.e. $500 billion or more) have likely been priced into markets, we could be in for a classic case of 'sell the fact' after the announcement, especially if the Fed decides on a more cautious, incremental approach," he writes.

No one is certain how the markets will react to this week's news, but history suggests more positive developments are to come in the near future. "Taken together, the next three quarters, including the quarter currently in progress, historically provide three of the four biggest quarterly gains over the past 20 election cycles since 1929, with average returns of 5 percent to 6 percent per quarter," Steinhilber writes. He suggests investing in high-quality, large-cap U.S. stocks and emerging markets stocks.

Index Universe: QE2 and the Midterm Elections

[See U.S. News's Why the Dow Usually Rallies After Midterm Elections.]

Instead of talking about what the Fed will do, a recent article discusses what else the Fed could be doing. The Fed will more than likely purchase an unspecified amount of long-term treasury bonds, but "in theory, there's nothing the Fed can't buy," says Paul Ashworth, U.S. economist with Capital Economics. Instead of buying treasury bonds, some economists favor other options like buying up debt of Fannie Mae and Freddie Mac to jumpstart the housing market or bonds issued by state and local governments to help them pay off their debts. Some economists also suggest a more gradual program instead of buying up one large lump sum of assets. CNNMoney reports that mainstream estimates put the overall total for quantitative easing anywhere between $500 billion and $1 trillion.

CNNMoney: What the Fed should really be buying

[See U.S. News's Why More Quantitative Easing Could Be a Mistake.]

Since another round of quantitative easing involves the Fed buying up assets and further adding to the deficit, many experts are worried that it could hurt the value of the dollar. A recent U.S. News post explains the dilemma. The worry for many U.S. investors is the future of the greenback, as more dollars (actually, bank reserves) in circulation dilutes the currency's value. "Bottom line, we're in this low interest-rate environment, and it looks like there's going to be more quantitative easing, and it doesn't bode well for the dollar," says Tom Lydon, editor of "You want to protect against the sliding dollar." Three options for investors: savings accounts in foreign currency, exchange-traded funds that provide income through accruing interest from foreign currencies, or simply buying an international stock or bond mutual fund that invests in a local currency instead of hedging its investments back to the dollar.

[For more investing insights, see U.S. News's new blog, The Smarter Investor.]