Mailbag: Answers To Your Questions on the Big Beautiful Bill, US Debt, Dividend Investing and More

Transcript

Michael Hansen:

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. 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 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, or 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 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 analyst to tell you that the budget deficit is too high, wait for the market to do that. Going back about 10—now, 15 years, almost—to the European sovereign debt crisis, the so-called PIIGS 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 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 returns, 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 5-10 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 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 therein, 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 impact has 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. 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 10, 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 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 market's a safer way to ballast 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 ballasts 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, 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 investor 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 as 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?

Hi, this is Ken Fisher. Subscribe to the Fisher Investment YouTube channel if you like what you've seen. Click the bell to be notified as soon as we publish new videos.