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?
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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.