RANDY FREDERICK: After an unusually quiet week last week, market volatility is back, and news out of Washington D.C. is at least partially responsible. Mike Townsend joins me for this week’s Stock Market Report to talk about some of the reasons investor anxiety is on the rise.
OK, Mike, so this topic may not be getting quite as much media attention as some of these others, but, once again, it looks like we’re facing another potential government shutdown at the end of this week. What can we expect out of Congress as they put the final touches on their massive spending bill, and is there any real chance that the government will shut down this time?
MIKE TOWNSEND: Well, Randy, it seems all too familiar, doesn’t it? Here’s what’s happening: Back in February, Congress reached a two-year budget deal to great fanfare, but that deal only set the overall total spending for government for the rest of this fiscal year and fiscal year 2019. What still has to happen is that Congress must divide that amount up on a program-by-program and agency-by-agency basis. The February deal provided enough short-term funding to keep the government open and operating only through this Friday, March 23rd, so that’s the deadline that Congress is now facing. Congress is trying to pass a giant bill, known as an omnibus appropriations bill, that will bring all the spending decisions into one bill. The hope is that the House will pass it on Thursday and that the Senate will follow suit on Friday. Obviously, that’s a pretty tight timeline, and there could be complications. President Trump has threatened to veto, and there are negotiations that are still going on as the bill is being written.
I think even if things go sideways this week, however, the chances of a shutdown remain low. Voters from both parties really panned the last shutdown that happened in January, and if Congress can’t reach a deal on this big spending bill, then I think the backup plan is to pass another short-term extension of a week or two to buy themselves more time for negotiation.
RANDY: OK. Well, last week, the Senate also passed a bipartisan bank reform bill, which is the first change to the Dodd-Frank Act since the financial crisis. Now, can you tell us a little bit about what this is about, and does it have any real chances of becoming a law?
MIKE: Yeah, the most significant aspect of this bill is a provision that would raise the amount of assets a bank needs to have in order to be automatically designated as systemically risky, and that brings with it enhanced regulation and oversight from the Federal Reserve. The Dodd-Frank law set that amount at 50 billion in assets, but this bill that was passed by the Senate would raise that threshold to 250 billion in assets. And there are about two dozen or so banks that are in that 50 to 250 billion category that will now not be designated as systemically risky. There’s also a number of banks that have hovered just below 50 billion in assets, unwilling to grow and trigger that additional regulation. The bill also includes several provisions that would ease the regulatory burden on the smallest banks, those under 10 billion in assets, so that’s a win for them. I think if the bill does become law, you may see an increase in mergers and acquisitions activity in the financial services space, as banks take advantage of those new rules.
Where we are now is that the Senate passed the bill 67-31, so that included more than 15 Democrats, but the bill is getting some push-back now from a surprising source, House Republicans. That’s because the House passed a much more far-reaching bill last year, and the House is reluctant to sort of give up on their version and just take this more modest Senate version. But the reality is that the Senate bill is a product of more than a year of bipartisan negotiations that have produced a very fragile coalition that supported the bill, and I think any changes to the bill will probably fracture that coalition. Right now, we’re sort of in a standoff between the House and the Senate, but given that there’s strong support in the White House and even among Senate Democrats for this bill, I think, ultimately, it will get passed later this year.
RANDY: Well, that’s good to hear. You know, another development last week was a court's decision to throw out the Department of Labor’s fiduciary standards bill. Now, this is one of those things that investors may not know all that much about, so can you remind us what this bill is about and what ramifications that decision might have for individual investors?
MIKE: Sure. And this is the latest turn in a saga that has actually run for about eight years. Last year, a new Department of Labor rule went into effect that redefined who is a fiduciary and cracked down on conflicts of interest in the retirement savings space. Basically, the rule required anyone providing investment advice to a retirement account to do so in the best interest of the client. It was controversial for a variety of reasons. It created a new private right of action, it required clients and advisors to sign a best interest contract, and it meant that there were different sets of standards for retirement accounts and non-retirement accounts, which is confusing for clients. But we and every other financial institution began complying with the rule when it took effect last June. A second part of the rule was supposed to go into effect on January 1st, but it was delayed for 18 months by the Trump Administration while they considered whether the rule needed revision. Last week, however, the U.S. Court of Appeals for the Fifth Circuit invalidated the entire rule, saying, among other things, that the Labor Department exceeded its authority when it wrote the rule. That decision becomes effective on May 7th, after which we go back to the way it was before, as though the rule had never happened. There could be an appeal, perhaps to the Supreme Court, but we don’t know yet whether that will happen.
I think the thing to watch for next is that the SEC is reportedly planning to propose its own best-interest standard. That would apply to all types of accounts, retirement and non-retirement, and would harmonize broker-dealers and investment advisors under a single common standard. That rule could be proposed as soon as next month, so we’ll be watching out for that to see what the next development is in this story.
RANDY: Mike, great information for investors to know. Listen, you can read more from Mike in the Insights & Ideas section on Schwab.com. And, don’t forget, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. And until next time, invest wisely. Own your tomorrow.