Proposals from Congressional Democrats to orient the fiscal stimulus package toward social spending rather than infrastructure investment threaten the stability of stock prices.
It was those proposals along with President Obama’s negative tone on the economy that sent stock prices reeling Tuesday.
Obama is trying to scare people. He’s focusing on the economy’s negatives rather than saying the positive things that can happen. That’s probably a smart thing to do from a policy perspective, but it pushed stock prices down.
As for the Democrats in Congress, such as so-called leaders Nancy Pelosi and Barney Frank, they’re putting together a spending plan that’s very disappointing.
Of the $850 billion allocated in the plan, I found only $81 billion that could be classified as investment spending that will stimulate the economy.
The remainder would go to extending unemployment benefits and food stamps, giving aid to states and tax breaks. That plugs holes but doesn’t stimulate anything.
That’s just not going to work. It’s a bunch of nonsense and frankly quite disappointing.
I’ve been very behind a major fiscal stimulus plan. I’m very supportive of some of the proposals Obama has been making. Some of them are very socialistic, but we’ve been in a socialist country to some degree since the 1930s. We need to live in the real world.
On the tax front, congressional Democrats are emphasizing tax cuts. That won’t work in this type of environment. Tax cuts won’t get the economy going right away.
Monetary policy isn’t the answer either. Lower interest rates can’t force banks to lend money, and they can’t force businesses and individuals to borrow money by taking out loans.
What the government should focus on is the kind of infrastructure projects that Obama proposed during his campaign and since.
But if instead the Democrats in Congress just work at plugging holes, we could be in for some real trouble.
As for the exchange traded funds (ETFs) that are my bread and butter, the outlook there depends somewhat on the outlook for the fiscal stimulus package.
As you can see, I’m critical of the Democrats in Congress. But I have great respect for President Obama. I think he’s smart enough to shy away from these proposals of his fellow Democrats and to emphasize the investments that have always been his focus.
In our aggressive ETF portfolio, we still recommend a fully invested position in equity ETFs. If we end up with a smart fiscal stimulus policy, there will be a big pickup in economic growth later this year, and stocks will go along for the ride.
Obviously I have concern about the stimulus package, which needs to be adjusted, but the downside remains limited for stocks.
As for the conservative ETF portfolio, we have recommended a 55 percent allocation to cash for four to six months now. We are maintaining that very conservative stance.
Bottom line: the fiscal stimulus package largely will determine what happens to stocks in coming days. Let’s hope Democrats in Congress decide to do the right thing.
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