Four Strategies For A Government-Driven Economy

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OCEAN CITY – Initiatives began to flow from the White House practically from the moment Barack Obama took office as our 44th president. So far, there have been two centerpieces of the administration’s efforts. First came the American Recovery and Reinvestment Act, signed into law in February, which pumps $787 billion into state and local projects with the goal of jump-starting the economy and creating or saving millions of jobs. In March, Treasury Secretary Timothy Geithner revealed the details behind his ambitious plan to funnel as much as $2 trillion of public and private funds into a massive, multipronged effort to help stabilize the banking system, promote lending to businesses and consumers, and initiate efforts to help homeowners stave off foreclosure.

Expectations remain high for all the administration’s efforts, although it’s much too soon to know whether the plans, taken together, will satisfy many investors’ hopes for a quick solution to the financial crisis and economic uncertainty. In the meantime, a great deal of anxiety persists in the markets, along with varying opinions about what these government programs mean and how effective they will be.

So, what are investors to make of the spate of activity designed to pull the economy out of its downward spiral? As the government emerges as the primary driver of economic growth, it may be time to adjust your portfolio accordingly. As you do, consider four strategic directions that take advantage of the government’s more prominent role in economic recovery.

– Emphasize social benefits. While private-sector projects often benefit society at large, either directly or indirectly, most government initiatives cite broader societal goals as their primary focus. Investors may want to consider companies with explicit education, health care or environmental missions. Stimulus funds being directed to job retraining, for example — as well as for Pell Grants and higher federal loan limits — are positive indications for education-focused stocks.

– Stick with stronger bonds. The overall safety of bonds — which has been a growing concern in a weakening economy — is showing recent signs of improvement, largely because the percentage of the bond market wholly or partially backed by the government has escalated from a low of less than 67% in the spring of 2007 to nearly 73% in early 2009. This government backstop is helping to offset discouraging private-sector earnings news, which could put additional pressure on corporate debt.

Focus on high-quality stocks. The surge in government spending may not do much to bolster the broad equity market, which isn’t likely to improve until companies’ core businesses begin to show signs of growth. Some sectors, however, could see the positive effects of government outlays earlier than that. For example, stocks in the defense industry, one clear government priority, tend to perform better under Democratic administrations than under Republican ones.

– Don’t overreact to inflation worries. Because huge government expenditures often lead to inflation, many analysts have fretted that consumer prices, now flat or falling, could soon surge higher. That possibility could affect investors in three years, but for now employment, credit and wages continue to decline, making near-term worries about inflation seem misplaced.

By concentrating on the opportunities presented by new realities, you and your financial advisor can shape an investment strategy that’s truly built for the future.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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