What Obama's Stimulus Plan Suggests for Investors

Even as we speak, a giant, hulking mass is moving slowly through the halls of Congress -- a specter none other than the $800 billion stimulus plan.

This plan in its current form contains a mix of government spending initiatives and tax cuts for individuals and corporations. In recent weeks, more and more companies have announced mass layoffs, including Boeing (NYSE: BA  ) , Pfizer (NYSE: PFE  ) , and Starbucks (NYSE: SBUX  ) , and consumer confidence has sunk to new lows. The package is designed to jump-start the economy and pull it out of its downward spiral. While passage is not a sure thing just yet, investors should know how it might affect them.

A few worthwhile considerations
Many of the stimulus package's provisions call for massive government spending on targeted segments of our economy. President Obama wants to update technology in the health-care field, so one area that could get a boost from this rash of spending is health-care information technology stocks. Proactive investors should take a look at prospects in this field, including Cerner Corp. (Nasdaq: CERN  ) or Quality Systems (Nasdaq: QSII  ) .

There is much debate over what the long-term ramifications of such an enormous stimulus plan will be. Without a doubt, it will increase the federal deficit by a significant margin, potentially causing a fiscal hangover years down the road.

This could put upward pressure on interest rates in the future, making it more expensive for companies and individuals to obtain financing. In this case, investors should consider stocking up now on a few big-name consumer staples that have the ability to survive and possibly thrive in such an environment, such as Wal-Mart (NYSE: WMT  ) or McDonald's (NYSE: MCD  ) .

Bonding over bonds
If you're looking at fixed income, you have a unique opportunity to take advantage of changing conditions in the market. The financial crisis has spurred a flight to quality as scared investors have flocked to ultra-safe Treasuries. Of course, this increase in demand has sent prices up and yields down to pretty unattractive levels.

The proposed stimulus spending would flood the market with additional Treasury securities, further inflating that bubble. It will burst sooner or later, so consider backing away from Treasuries right now and picking up some high-quality corporate bonds. Select corporate debt is relatively attractive right now, and offers higher yields than government bonds.

And while right now the biggest worry for the economy is fighting the effects of deflationary forces, that likely won't always be the case. With the government cranking up the printing presses and flooding the market with money and a massive stimulus bill, eventually, somewhere down the road, inflationary pressures will result.

To head off the effects of inflation in future years, bond investors may want to think about getting into inflation-protected securities now. They are one of the best avenues for fixed-income investors to battle inflation and preserve the purchasing power of their portfolios.

A taxing question
In the near term, Americans should see a reduction in their tax burden if and when the stimulus package goes into effect, thanks to the plan's scheduled tax cuts. That's great news for the short run, but the long-term picture is slightly different. Eventually, taxes will have to rise to help pay for the immense spending and financial bailout taking place today. Our government simply cannot spend like a drunken sailor as it will have to do to pull the economy out of its spiral without increasing taxes somewhere down the road.

Investors can take steps to prepare their portfolio today for possible future tax increases. If you are eligible, now is the time to get into a Roth IRA or Roth 401(k). These plans tax your contributions now, but allow you to make your withdrawals tax-free down the road. Since it's better to pay a lower tax rate now than a higher tax rate in the future, these plans may be one of the best ways for investors to build up their ravaged portfolios.

Where do we go from here?
While the efficacy of any government stimulus plan remains to be seen, investors are desperately seeking guidance in today's frightening market. If you want a helping hand in sorting through the wreckage of the stock market, be sure to check out The Motley Fool's Champion Funds investment service. We've got the lowdown on the best funds run by the best names in the business that can help you get your portfolio back on track. You can test us out with a free 30-day trial today. 

It's not yet clear what form the stimulus plan will take, but investors should prepare themselves now and position their portfolios to benefit from this historic undertaking.

Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Quality Systems and Starbucks are Stock Advisor recommendations. Starbucks, Wal-Mart, and Pfizer are Inside Value picks. Pfizer is also an Income Investor recommendation. The Fool owns shares of Pfizer and Starbucks. Click here to find out more about the Fool's disclosure policy.


Read/Post Comments (5) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2009, at 4:08 PM, TexasLonghorns wrote:

    At the present rate of things I suggest that his plan is going to have us ALL living in cardboard houses...standing in soup lines!

  • Report this Comment On February 10, 2009, at 4:56 PM, 1peter11 wrote:

    The drop in the U.S. stocks on 2/10/09 has provided a great opportunity for anyone who wants keep selling covered calls for a long time.

    UYG is selling within a few cents of the lowest strike price of $3.00. The best way to do this is to buy as many hundred share incriments of UYG as possible at or below $3.00. When UYG goes up at any time one may sell covered calls at a price above the lowest strike price and still retain all the shares purchased if UYG doesn't close below any stike price at options expiration.

    It is also possible to sell $3.00 strike price puts without having to purchase shares of UYG. One must have enough money in a brokerage account to back up the number of shares sold at the $3.00 strike price. The only way one can loose money by selling the puts is if UYG was selling below the $3.00 strike price and the puts are excercised by the buyer of the put at options expiration.

    Purchasing as many shares as possible of UYG below $3.00 is safer at this time in our economy than dealing with calls and puts because the longer one holds the shares and gives the time necessary for the stock market to correct itself when the effects of the stimulus package starts working to correct the financial mess, the greater the chance of making a lot of money in each and every month of options trading of UYG by selling covered calls. It will be worth the wait for the time when UYG goes a lot higher as the economy improves.

    Purchasing the shares of UYG at or below $3.00 is a way to not take any chances with ones money and be assured that by selling covered calls it is very unlikely that UYG will be below $3.00 for very long. UYG trades well over 150 million shares every day, so there is a lot of trading and volatility with UYG. I am selling every stock I own and buying UYG as I see this as an opportunity to provide myself with a steady income by selling covered calls for a long time.

    This is an investment in which one can not loose money and not make lot of money in a short period of time, but rather make steady money all the time for as longas one owns UYG.

  • Report this Comment On February 10, 2009, at 6:05 PM, olboy2 wrote:

    The good ol' boy says People don't seem to understand Bush spent 9.5 trillion on his pork

    ideals and now Oboma wants to heal the problem by spending us out of trouble. Business 101 in order to make money one must invest, investing is risk but it does have its rewards. And if this stops the layoffs and jump starts the money flow the investors have a great chance to cash in. Also may restore some of the middle class.

  • Report this Comment On February 10, 2009, at 10:10 PM, wesevans wrote:

    when discussing taxes and tax rates we should remember that higher marginal rates do not necessarly translate to higher revenue. By the way why not the Fair Tax? It would broaden the base, decrease cost of compliance and collection and level the playing field with foreign producers.

  • Report this Comment On February 11, 2009, at 1:26 AM, ariel1939 wrote:

    I've been very frustrated that Obama defends the stimulus package as a bipartisan bill when the far left among Pelosi friends wrote all of it with minor exceptions. CBO indicates that tax relief is only 22% of the bill. Demos claim that it is 40% is based on the dangerous "payroll tax holiday". SS payouts are skewed completely to the poor. If they then get major relief on paying in, then they don't own it, don't know when to quit raising it, and we might as well through in the towel on controlling entitilements. I hope the next bill originates in the white House so Obama will own it.

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