Momentum Slight in Markets

Good morning, Brian.

Ford:  Good morning, Wayne.  How are you?

Alright.  Well, it's been a couple of weeks since we've had a chance to talk, due to the Labor Day break last week.  The stock market still looking kind of sluggish to me, as some of us getting our 401(k) and 403(b) statements and so forth; other kinds of statements and are not finding much to cheer about.  But, are you seeing any shift in momentum in the stock market?

Ford:  Well, in a word, yes.  The past couple of weeks have actually been good.  It's been actually a pretty good start to September thus far; up over five percent just for the month, despite that fact that September is typically the weakest of the twelve months.  There's still a lot of people out there nervous about how the month ends up.  We're actually, as you heard on NPR just now, expecting another good start today, based on some announcements that came from Basel, Switzerland, which we'll talk about in a minute, on banks.  But, you're right, it's still very much a back and forth momentum that currently--to use a football term, Wayne--the offense is on the field.  One report summed it up well this weekend.  They called it a market of risk on or risk off.  Risk on means stocks are likely to be going up and people are buying stocks.  Risk off means they're selling stocks and buying bonds, so bonds are likely to go up.  So, when does it switch?  Who knows?  More difficult for individual investors to be as nimble and quick as other institutions in changing their investment strategy, which is why some people think that this market feels like a roller coaster, going up and down and sideways.  And it basically just leaves you back where you started.  So, this risk on/risk off, it'll be a few days here, a few weeks there and then momentum will shift.  But, right now the risk is on.

We're going to be marking a somber anniversary this week again after the one of last week.  This one the anniversary of the, I guess the start of the financial crisis.

Ford:  Yes, you're right.  We passed the nine-year anniversary of 911 this weekend with somber reflection, of course.  And this week we passed another anniversary--the two-year anniversary of the fateful mid-September day in '08 when Lehman Brothers failed, AIG had to be bailed out and Merrill Lynch had to essentially sell itself quickly to Bank of America.  In some ways, Wayne, a lot has changed since then in the political and business worlds; but in a lot of ways not a lot has changed.  Investors are largely still very nervous and tentative and just unsure of what to do.  One concrete change has been new banking regulation that is quickly becoming the law of the land.  Earlier this summer, you know, the U.S. Congress passed what's called the Dodd/Frank Bill in order to try to reign in reckless lending and investing practices by banks.  Now over the weekend our European colleagues making up the G20 met in Basel, Switzerland to agree on some historic banking reforms.  Basically, Wayne, there's only three major things a bank can do to raise their capital ratio to safe levels.  First thing they can do is raise more money from investors, which will dilute existing shares.  The second thing they can do is hold back earnings and, essentially, not pay dividends.  The third thing they can do is simply cut lending.  The Basel meeting essentially will now require banks to hold what are called 'core assets' or they're called 'tier one assets' up to seven percent of their risk assets, up from two percent.  That's a big jump.  Bankers, of course, have been fighting this, but, in truth it's not as bad as some had expected.  The flip side is that they naysayers believe this won't do anything to stop the next crisis.  Banking problems do tend to not really repeat themselves from recession to recession and some observers note that these new regulations are designed to fight the last problem, not future problems.

Congress back in session and most analysts say that the economy is what's on the mind of most voters, as the Congressional elections near.  So, what's the chance that Congress might really do anything in the few weeks before the election.

Ford:  You know, that's a really good question, Wayne.  I don't know.  Will Congress act before election day?  You're right, it is very much a topic on everyone's mind.  Really, there's a very small window here because a lot of the Congressional members--because remember, every single member of the U.S. House is up for re-election this year, so they're actively goint to be on the campaign trail very quickly--but, they're back from their August recess this week.  The big topics are tax cuts due to expire in December.  Will they be extended to all taxpayers or just those at certain income levels?  The current tea leaves are saying that the Obama Administration and certain Republicans are supporting extending the tax cuts to those making 250 thousand dollars and less.  Will there be any retroactive cuts inacted next year.  That's certainly more problematic.  It's creating terrible confusion among business owners who increasingly cite this uncertainty, and the health care bill uncertainty as reasons not to hire employees back.  The other major piece of legislation that Congress may consider, and they may consider it as early as this week, Wayne, is a new spending program aimed at small businesses.  Now, this will total about 42 billion dollars of temporary tax cuts and also spending in general.  The Obama team is very careful not to use the actual word 'stimulus' because they know it has very bad conotations right now, for a couple of stimulus packages that haven't worked as well as they thought.  The Obama team insists on using the word 'spur' instead of 'stimulus'.  We also notice that last week that Japan felt it was necessary to launch its own new 11 billion dollar stimulus package.  Like the U.S., Japan is cooled off lately after a very strong start to the year.  So, will Congress act?  I don't know, but, it's a tight window for the next couple of weeks.

OK, Brian.  Our time's gone for today, so, we'll have to leave it there for this time.  Thanks to Brian Ford at RBC Wealth Management.