John Jagerson

Buying Stocks to Leverage Government Spending

    Tweet This

Free Trading Guides

The rise in stocks today triggered a shift in the risk environment. The one-day move pushed the U.S. dollar down against most of the major currencies and contributed to a rise in commodity and stock prices.

The news over the weekend is the likely cause of the shift in assets. U.S. president-elect Barack Obama announced ambitious plans to increase government spending on infrastructure projects. The news buoyed investor sentiment and sent stocks rallying and bonds down.

Large infrastructure spending is one of the slowest ways to get money into the hands of consumers when compared to just sending them checks but is not an unexpected move. The Japanese did the same thing during a similar crisis in the '90s. If you are interested in how the Japanese bailout plan worked (or didn't), click here for more.

Because we can't expect the government to streamline this whole stimulus thing by sending us checks we need to plan ways to profit from the spending in other ways. Big infrastructure spending will increase demand for basic materials and commodities, and that seems to be the way investors are trading.

Investing in single basic materials firms like Alcoa (AA) or Nucor (NUE) may be tempting, but these are very risky bets and it may be best to stay diversified across a broad spectrum of stocks within the industry.