US National Debt, Investing for Dividends, The One Big Beautiful Bill Act and More–August 2025

Transcript:

[Transition Music]

Naj Srinivas

Hello and welcome to the Fisher Investments Market Insights podcast, where we discuss our firm's latest thinking on global capital markets and current events.

I’m Naj Srinivas, Executive Vice President here at the firm and today, we’ll hear from my colleague Michael Hanson, Senior Vice President of Research.

In this episode of Market Insights, Michael answers some common listener questions to help you better understand the world of finance and investing.

But before we dive in, I'd like to ask you for a favor. Please recommend our podcast and rate it wherever you listen. In just a few minutes, you can help make this valuable information available to even more people. Thanks so much for your help, in advance.

With that, let's dig in with this month’s listener questions. Please enjoy.

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Michael Hanson

Hi, everyone. I've got some common questions here, often asked by our clients, and I'm here to answer them for you. At least the best that I can. First one I've heard before, deficits don't matter as long as the US can make the debt service payments. But is it different now due to the debt service amounting to a larger portion of federal spending?

Take the second part first. The answer is no. It's not different. For those of you watching this video, especially those of you with a lot of life experience. Just think back a few years. Go back to the 1980s. We've been worrying about budget deficits, debt for just as long as I've been alive, and a lot longer than that. You remember in the 1980s when we used to have these huge billboards? In fact, we still have them showing how the debt was racking up and how we'd never been able to get out of that. Well, things do ebb and flow, and our worries over the deficit today are not a lot different than they were then. In fact, if you were to measure interest payments or interest coverage as a percentage of tax receipts or GDP for the United States, it's about the same today as it was in the 80s and in the 90s.

We'll never stop worrying about it, though. And so what I want to say to you is that, it's okay to be worried about the debt and the deficits and still be in the market and an investor. You don't have to like the government spending all the money. I know, for example, I sure don't, I don't think they necessarily spend it as efficiently as they could. But that's different than saying ruin is just around the corner, and it's different than saying the stock market might be affected.

In the short term, the long term, the medium term, whatever you want to look at, there's just no evidence that budget deficits have any real impact, especially on the stock market. In fact, there's evidence that shows that once you hit extreme deficits, stock returns actually tend to get better even as the budget deficit starts to do well also, it starts to recover. And I'm wondering if you're going to start to see that over the course of this decade, because while people think that spending will be never ending, spending as a percentage of GDP ebbs and flows. And if you'll recall, in the 90s and even the first decade of this century, we were at balanced budgets or right around and near it.

Now, in the last several years, we've had things like Covid, big stimulus spending packages, high inflation, etc. it's sent interest rates up as well as government spending. But don't assume that just stays that way forever. Things don't stay the same as they are today forever. They ebb and flow. Through all of that, yes, you could see bond market impacts, and one of the things that I hear the most often is at what point is this bad for bonds?

And I think that's the right question, because don't wait for some analysts to tell you that the budget deficit is too high, wait for the market to do that. Going back about ten now, 15 years almost, to the European sovereign debt crisis, the so-called “pigs crisis”, as they called it. Those were examples of relatively smaller nations that were, in fact, starting to bump up against debt levels that the market wasn't comfortable with.

In other words, the market starts to tell you via higher interest rates, especially at the long end, about what might be dangerous and what not. When you look at the United States today, all of its interest rates, but especially the ones that are set at the market portion, are benign and well within historical normal levels. What that's telling you is that, yes, we do have a lot of debt, 37 trillion I guess at the last count is a lot of debt. But remember that the US economy is also around 29 trillion,1 year of the US economy. So yes, we do have stacking up debt. We also have the largest, most diverse economy with the most breadth by far of any other nation, which means that our ability to hold that debt is going to be stronger, much stronger, in fact, than most people can really fathom.

So you don't have to love it. But what you have to realize is that the US can, in fact, take on as much debt as it has. It's done it several times in the past, and that these things also ebb and flow. It's not going to stay the same as it is forever. In the meantime, it's good to be a hawk and watch those politicians as close as you can in terms of how they spend money. But in terms of the stock market, deficits just don't do what people think they'll do.

Next, what do you think about dividends for providing cash flow? Nothing wrong with it at all. I just wouldn't make it a strategy. And this is the part that I see so often with investors, a classic mistake in investing, which is that thinking that having dividends or having dividends in your portfolio is a strategy, it's not.

Getting dividends is a tactic, not a strategy. What you want to do, rather, is move up one level. It's not where you get the returns from dividends, price return, something else. It's about the total return. What you want to know first and foremost is, how do I get my total return to be optimized or maximized for whatever it is I'm trying to do?

What my goals are. In the case of stocks especially, that's a mix of price return and dividends. It's not one or the other, and it doesn't have to be. There are times, of course, when growth stocks, which don't tend to spend any on dividends. Instead, they reinvest their earnings, do much better than dividend paying stocks. And then there are times when companies that are more mature, who aren't doing as much investing, who do pay out money to their investors in the form of dividends, also do well.

But no one category does so well for all time. They rotate leadership. That's why you want to focus on total return. In terms of the tactic of dividends, if you need to raise income, sure, that's a great thing, but be thoughtful about it. Remember that dividends are mostly treated as ordinary income and have tax implications. There are other strategies, other ways to raise income for yourself that may not be so dependent on something like dividends.

For example, if you have your stock portfolio a few positions at a loss, you can sell those. Take the tax credit, pull that forward as a loss, and then get your income that way. And in fact, on an after-tax basis, that might be much more efficient than simply going after dividend stocks.

Finally, I know that especially lately, there have been some research papers floating around in my industry saying that dividend stocks have been shown to be better than other kinds of stocks for all time. And I just want to tell you how wrong that is. It's just nonsense. As I said before, leadership changes through time to simply go after a type of asset because of the way it pays out, is the wrong type of strategy. It's not a strategy. It's a tactic. Instead, think in terms of total return. Think holistically about how you're getting returns. And then from there, optimize based on your tax needs and otherwise.

Number three, are tax cuts like those in the One Big Beautiful Bill act beneficial for companies and stocks? To a certain extent, yes. But you know, the one big beautiful bill hasn't really been that much different than a lot of other first bills that presidents do. Taxes are changed a little bit. But that's classic for all presidents. They tweak them up or tweak them down a little bit as they do. Same thing with spending and other types of programs. But the simple fact is this bill is really not big enough to change the economy in a very meaningful way. There will be some industries impacted positively and negatively. That's always the case. You have to look at the details. But in terms of the  whole economy, the one big beautiful bill lowers taxes a little. It changes spending a little. Most of that won't be computed so well into the economy. And by the way, it takes 5 or 10 years for this entire plan to be enacted. And by then we'll probably have even made more budget changes. In fact, I'm pretty sure we will.

Importantly, though, for the investor, bills like this simply don't change the trajectory of the stock market. Look at the tax changes from this bill and then compare them to tax changes through time. There's a long history of looking at tax changes and the stock market. It's tends to be counterintuitive to what people expect. Tax cuts do not necessarily lead to a better stock market. And tax raises do not necessarily lead to a worse stock market.

Why? Well, the stock market is not just dealing in the what. It's also dealing in the future. It's discounting what it already knows and then looking forward. By the time you get new taxes, they've been debated forever in Congress, signed by the President, eventually enacted. By the time that's all done, markets have had time to digest the budget bill. The tax implications there in, it's already been imputed in prices and the market's already looking ahead. That tends to be the case for so many types of major legislation that by the time it hits the market impacts already happened. And as a result, you can't predict so much where asset markets are going to go based on tax changes.

And in particular, because these tax changes aren't so large, there's not very much there there. I would say that the stock market continues on the trajectory it's been, regardless of this bill, one way or the other.

Next. Why should investors consider investing in stocks when bond yields are higher than inflation? Implicit in this question is the notion that all you're trying to do is beat inflation, which is, for most investors, simply not true. And even if you were trying to beat inflation, is it really the best thing to just own a huge amount of bonds just because their yields have come a little higher? The answer to that tends to be no.

And so first, let's think about what your goals and objectives are. Is it just to beat inflation? If so, holding some bonds with a higher yield than inflation is a fine enough idea. But remember you're going to have to have a bond strategy that stays above inflation over time. It could go higher. It could go higher than those yields. Are you going to lock in those yields? In other words, are you going to hold some debt for ten, 20, 30 years to maturity? And are you really prepared to do that? Circumstances really change. Or are you going to have to go around and hold different types of bonds and create perhaps a laddered portfolio, or have a strategy there?

And in the doing of all of that, remember interest rates will change. So will the inflation rate. And at some point you might get caught up in all this. What I would do instead of all of that, is take a look at the stock market. It's interesting to me that people think bonds are a safer way to get away from inflation, because that's never been true.

Stock markets a safer way to balance yourself against inflation. Much safer than the bond market. Just think of it this way. Through time and history bears this out. In periods of high inflation, the stock market tends to impute that inflation rate plus the gains in earnings. So on a nominal basis, you're seeing the price actually include the inflation, as the markets go up. Stocks historically have been one of the best balanced against inflation.

Now compare that to bonds. When inflation goes up interest rates tend to go up. And what does that mean. The bond prices tend to go down. Is that a great ballast against inflation? Well it can be okay. But I don't think that's necessarily what people have in mind. What they're really looking for is to protect themselves from inflation. And then most investors I know, of course, are trying to get a little growth out of their investments as well. Nothing is better than the stock market for fighting inflation in that way.

Next, why does the stock market react to small central bank moves? One quarter of a percent seems insignificant. Well, I couldn't agree more, but I would say that, I don't think the stock market moves that much on Federal Reserve or Feds of any kind. Central banks of any kind. It's true that on the usually the day of the announcement of a cut or a hike, that you have the markets move. That's true. But if you just look 48 hours later, the effect on the markets of the new interest rate is nearly zero. In fact, for a medium to long term investors simply looking at the stock market, you can see virtually no effect of the fed on stock returns over time. It's negligible.

Anyway, as you think about the fed, I've always felt that people put way too much attention on this anyway. The question says it right. Is a quarter point change really matter that much? Not necessarily. But investors are thinking of where it's headed next. And maybe there are more cuts or hikes from there. And that can be a relevant thing to think through. But instead, think of it this way. The fed never really leads anything, does it? Inflation goes up and then the fed raises interest rates. Inflation goes down, and then the fed lowers the interest rates. In fact as I'm taping this they still haven't even done that yet. So they're not leaders, they're followers. And the idea that the market then is going to see the fed is a leading indicator to me, has always been a bit contrary and something I've never really, truly understood.

For the medium to long term investor, for the disciplined investor who's trying to own a share of some of the best companies in the world and get the long-term benefits from that via compounding earnings, the fed matters, but only a little bit, and only in the ultra-short term for cycles. Maybe Goosing up the economy a little bit, maybe not.

Of course, there are ways in which interest rates matter so much for the economy. People do adapt to new interest rates. Just look at the mortgage and housing market, which are materially different, less vibrant today than they were in the era of near zero interest rates. So these things do matter. But in terms of your investments in the markets, you are just as well to go out and play a round of golf and ignore that stuff and ask yourself one week later after the announcements, did anything even really change?

Is it a good idea to keep some cash on hand to take advantage of market opportunities? It all depends on what you're trying to do and what your goals are. But first, let's just take the idea of cash on hand. Dry powder. You're ready for the opportunity. This is a classic, idea from investors. Behaviorally, though, it tends to produce poor results. And I'll just be blunt with you on this, because I'm no different than you are. This business is about discipline and playing the right probabilities. It's not about being a genius or being clever. And when I think of it in that way, I know the following.

Over time, on any given calendar year, the stock market has a tendency to go up. And if I'm holding cash where otherwise I need hat cash to be at work for me in investment, creating returns for me. That cash just becomes a drag. And what I see inevitably over time with investors is they think they're being clever by holding on to some kind of dry powder, as if some sort of opportunity is going to materialize suddenly they'll be the only ones that see it, they'll take advantage of it. And the next thing you know, they make hundreds of percent if you like. I just see so seldom of that.

What I see instead is that people holding cash for too long, the market running up on them. And even when you do get a bear market or a correction, it may never even get back to the level that you were holding the cash at. And even if you did, you've gotta time it basically perfectly. This year is a classic example of that. Maybe you had some cash on hand, some dry powder, and maybe a few of you watching this actually did pull the trigger on that when the market was down nearly 20% in a matter of days, and it saw some great opportunity.

But you know what the truth is? Virtually none of you did that. And the reason is behavioral. Because in the midst of the April swoon tied to tariffs, people were terrified. You probably were, too, whether you want to admit it or not. Did you really have the courage to get in then, when everyone else said it's going down further? Or did you say you wanted to wait? Or did you say you wanted to wait until there was more clarity and it was higher and so on? The simple fact is, whether you're holding cash for some kind of opportunity or not, you still have to have the same basic psychology of being willing to do it when other people are not willing to.

And you have to believe you're more clever than the rest of the market, which is very rare indeed.

But if you put all that aside anyway, the idea of having, you know, being a genius and having cash on the sidelines, that you're going to do something so smart with. And instead go towards discipline, which is what this business is about and how you make money, then you think of it this way. What are my goals? What do I want my money to do? What is the idea here? What am I trying to get at? When you ask that question and answer it clearly, then the rest of it falls into place. And you don't need things like cash on the sidelines because it's not about catches, catch can and getting a great little opportunity here and a great thing there.

What it's really about is capturing the long-term performance, let's say, of the stock market or of the bond markets, whatever capital market it is. Doing that in a disciplined fashion such that you can finance your future. That's, generally speaking, what I encounter with my clients. And so you get your goal. Then you go to asset allocation. Asset allocation is the part that will determine your long-term return, not cash on hand or some kind of opportunity.

What is the mix of stocks, bonds and yes, cash, alternatives, real estate? Maybe you had some Beanie Babies for all I know. And good luck to you with that. But whatever it is, take the totality in mind. Ask yourself, given my goals, especially if I'm looking to grow my investments, is it a good idea to have this much cash on hand, knowing that it will probably serve as a drag on my returns?

If you know your goals, you can answer that question. You know how much stock you need. You know what your time horizon is. If you don't know what your goals is, that's just what you're doing. You're just taking catches, catch can and it's not disciplined, and it won't get you to where you want to be over the long haul. At the end of the day, this is not a business about being clever. It's about discipline. It's about probabilities, and it's about understanding what you need to get out of your assets and finding the right tactics in order to do that, not the other way around.

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Naj Srinivas

That was Michael Hanson answering listener questions as part of the monthly mailbag. Thanks so much to Michael for sharing your insights with us.

If you want to learn more about the topics discussed today, you can visit the episode page of our website on Fisher Investments.com. You can also find a link to that in the show description. While you’re on our website, you can also subscribe to our weekly digest, which rounds up our latest commentary and delivers it right to your inbox every week. And if you have questions about investing or capital markets that we can cover on a future episode of Market Insights, email us at marketinsights@fi.com.

We'd love to hear from you, and we'll answer as many questions as we can in a future episode.

Until then, I'm Naj Srinivas. Thanks so much for tuning in.

Disclosure:

Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis, or reconsideration. Copyright Fisher Investments.