Elliot S. from North Caldwell, NJ asks: Hi Mitch, In the financial media there are warnings that economic policies under a Harris or Trump administration would have inflationary effects. It appears that inflation is therefore inevitable, reducing the buying power of our U.S. Dollars. As a retiree, concerned more with spendable income than capital preservation, should I be more heavily invested in fixed income securities such as Preferred Stocks?
Mitch’s Response:
Thank you for emailing your question. Whether it’s tax and spend policy proposals for a Harris administration or across-the-board tariffs under a Trump administration, there’s been talk in the financial media of inflationary impacts under either scenario. There are some valid arguments for how these various policies could apply inflationary pressure, but here’s the kicker: campaign ideas, proposals, and talking points often do not become actual policy.
We’ve seen this time and again throughout history. In many cases, policy proposals require Congressional approval, and it appears for now that a majority in either the House or the Senate would be very slim, making the 60-vote threshold in the Senate a steep hurdle to overcome. We also often see a new president drop some proposals in an effort to negotiate on others, or water down policies such that they’re far less sweeping than what was said on the campaign trail.
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In short, I think now is a time for investors to observe and take note, but not to necessarily react to what is being proposed. In the parlance of investing and politics, it’s important to focus on what parties and politicians do, not what they say.
On the issue of tariffs – just to offer an example – a president has quite a bit of executive authority to levy tariffs on imports, but much of the latitude must be applied to national security or dumping grounds. Many such tariffs could be applied on Day 1, but it is also easy to imagine legal challenges in hundreds or perhaps thousands of cases where industries put forward objections. In other words, the potential for inflationary impact is not necessarily automatic.
Presidential administrations also have a greater ability to pass tax and spend policies based on budget reconciliation, which can pass both chambers with a simple majority. But much like I mentioned above, I think it makes sense to wait and see what the actual plans are and what ultimately works its way through Congress, which I doubt will look exactly like the ‘wish lists’ we hear about on the campaign trail. Higher top tax rates coupled with increased spending plans are not automatically inflationary and could have the opposite effect if taxes choke off growth.
As for the second part of your question, I cannot offer asset allocation advice without knowing more about your financial situation, income needs, risk tolerance, investment horizon, and long-term goals. But I can say that investors interested in generating income in their investment portfolios often benefit from a diversified approach of fixed income, preferred securities, and dividend-paying stocks—all of which we manage here at Zacks Investment Management. Income generation and cash flow management are key for many retirees, but I often remind retiree clients that growth is almost always a key objective as well—so that income can be provided through someone’s entire retirement life. That generally means owning a diversified portfolio of equities as well, in such a way that aligns with each individual or family’s objectives.
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Disclosure