On a day where we saw very strong reports on jobs/unemployment, an even stronger signal hit markets mid-day. President Trump signed a new executive order commanding the Department of Treasury to begin rolling back the most onerous segments of the Dodd-Frank Act. What this means for you…
$1 The financial sector and tangent companies, like insurers, will directly benefit from the rollback of Dodd-Frank’s rules. Stress tests and various other rules that govern reporting to various arms of the government have increased bank’s needs for risk management staff and at times limited their ability to engage in some riskier trades (remember, higher risk = higher reward). The biggest issue debated after the great recession was the use of ordinary savers’ funds for risky trades, like buying mortgage-backed securities, credit default swaps, etc etc. Don’t worry about what these things are, just know that they put increased risk on the backs of normal retail banking customers without their knowledge, an issue that Dodd-Frank looked to address. The question is whether this legislation hand-cuffed banks unnecessarily. Pres. Trump argues yes.
$2 Another target of President Trump was the Department of Labor’s fiduciary rule. In lay terms this rules mandates that financial advisors act in their client’s best interests and also disclose additional information about their firm, putting many firms’ practice of exclusively offering particular products (with the promise of kickbacks) at risk. Proponents of this rule argue that this protected those middle class citizens that are planning for retirement from predatory advising services that put their future at risk. Opponents of the rule argue the fiduciary rule simply leads to increase advising costs to compensate fort he additional risk, thus pricing out the middle class from quality advisors. Obviously President Trump agrees with the latter.
$3 The combination of the positive jobs report and the executive orders signed today, investors added to the mounting exuberance mounting in the markets. While this is a great time to ride the market and pick select stocks to continued riches, I do have to warn that this exuberance may prove naive. The legislation that is on the slate for this year — namely replacement of the Affordable Care Act and tax reform — does not appear to support middle class Americans in any extensive amount. Whether or not you are a fan of the ACA, it does push billions of government dollars into the economy, something that the current administration is looking to reduce. Further, most of the tax cut proposals thus far have been geared towards the upper class, which may not hurt the middle class, but doesn’t help either. I do not think market prices are reflecting either of these realities.
With all of this said, continue to make money with the markets, but prepare to get properly hedged and be agile enough to get out of a position when it no longer fits your investing thesis. More regular check ups of your portfolio may indeed be apropos for the next year or two.