Monthly Market Monitor - April 2010

All Eyes on Washington
Markets continued to march higher as most of the investment community, and the country as a whole, was focused on Washington. After months of debate, the House voted 219-212 in favor of the healthcare reform bill. President Obama subsequently signed it into law, marking the passing of one the most sweeping pieces of legislation in decades. The immediate effects of the new laws are likely to be much smaller than the long term outcomes. Strategists are generally uncertain as to what the impact will ultimately be to the numerous sub-sectors that make up the healthcare industry as it is simply too early to tell at this point.  In addition, the legislation is likely to face a number of legal fights over the years. For example, fourteen states have already filed legal challenges as to the constitutionality of the bill. While most analysts don’t think that these challenges will ultimately be successful, it nonetheless is indicative of the ongoing battles that are likely to be waged in the future.

Now that the healthcare legislation has passed, attention is turning toward financial market reform. Senator Chris Dodd, the Chairman of the Senate Banking Committee, recently unveiled his version of the financial reform bill. It would give the government power to seize and dismantle failing financial services companies and would require banks to contribute to a fund to pay for it. In addition, it would create a “Consumer Financial Protection Bureau” within the Federal Reserve. In its current form, it does not have the bipartisan support that many had hoped form. None of the ten Republicans on the banking committee endorsed the plan. However, there is general agreement that legislation in some form needs to be passed. The question is not if something will be done, but what shape it will take and how it will ultimately impact financial markets.

Government Budget Deficits
Governments around the world borrowed and spent heavily during the financial crisis in an effort to reduce the impact of the global recession. These efforts were likely an important factor in the recovery. But they also resulted in much higher deficits for many countries, including the U.S. Greece was the first country to spark fears of a debt crisis when it announced a budget deficit equal to 12.7% of GDP for 2009. This is more than four times higher than the European Union’s 3% limit. In the U.S., that figure was 9.9% of GDP. Some strategists argue that, at least here in the U.S., future economic growth and spending restraint will be enough to tame these deficits. Others, however, think more drastic measures will need to be taken. Social Security and Medicare reform, they argue, will ultimately be required in order to rein in spending. For now, however, efforts in Washington will likely continue to be aimed at more immediate concerns such as financial market reform, energy legislation, and national security.

1. Wall Street Journal, 04/01/10

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department, Cetera Financial Group, and should not be construed as investment advice.

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