Investing and the Impact of Obama Stimulus Package

The Obama Administration and the Democractic Senators and Representatives are rolling out a $825 Billion stimulus package. Since investing is about making decisions based upon financial events, what moves if any should be done?

This amount is roughly equal to $3,000 for each citizen. I doubt that my family will see $12,000. Who will get the money? Businesses and banks will be the primary benefactors rather than directly to the citizens.

In order to share in this money you need to buy stock in businesses and banks.The next question is should the stimulus package increase stock price? Stock price is a function of interest rate and growth rate. Stock prices increase as the growth rate is higher than the interest rate. Currently, stock prices are at a negative growth rate indicating a future deep recession. The stimulus package will increase the growth rate of business and banks which means that the long term impact of the stimulus package should raise stock price. Virtually all segments of our economy will get money, kind of like putting butter on toast. Companies that provide infrastructure products will do really really well, such as basic materials, electrical power infrastructure, and wireless communication.

Another result will be higher interest rates. The risk from the stimulus package is to create inflation which would result in an interest rate above the growth rate. Higher interest rates are great for short term bonds such as a money market fund and kills long term bonds. Stocks should be balanced with short term bonds and long term bonds should be avoided.

Stock prices around the world are linked to the US economy as we import more than we export. We are the biggest consumers of any other country in the world. Global stock prices will rise as our stock price rise. This means that a portfolio of US and International stocks should do well in the future.