Obama Health-Care Assent by Court Precedes S&P Rally

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U.S. President Barack Obama
Barack Obama, U.S. president. Photographer: Luke Sharrett/Pool via Bloomberg

If investors expect President Barack Obama’s health-care reform law to freeze the American economy, they’re not showing it in the stock market.

About $470 billion has been added to U.S. equity values since the Supreme Court upheld Obama’s plan to provide coverage to 32 million uninsured citizens on June 28, data compiled by Bloomberg show. The Standard & Poor’s 500 Index posted its biggest three-day rally of the year and has risen 2.7 percent since the decision, with gains in 43 of its 52 health-care companies. HCA Holdings Inc., the largest U.S. hospital chain, has climbed 8 percent.

Equities are rising even as opponents from Republican House Speaker John Boehner to anti-tax advocate Grover Norquist warn the program will stifle free enterprise. While health-insurance companies are down 7 percent since the ruling, gains in everything else show investors remain focused on earnings growth, employment and efforts by European leaders to contain the debt crisis, according to David Kelly, who helps oversee $394 billion as chief market strategist at JPMorgan Funds.

“People have very strong political opinions and very weak analytical and investment opinions related to health care,” Kelly said in a telephone interview from New York yesterday. “The European summit that occurred that Thursday and Friday was far more important for global financial markets than the president’s health-care act. You saw that in the market’s reaction.”

Annual Increase

The S&P 500’s rally since the ruling has brought its increase for 2012 to 8.8 percent and handed investors in American stocks the only gains over the last 12 months among the world’s 17 biggest markets, data compiled by Bloomberg show. The S&P 500 climbed 2.2 percent since July 2011, compared with a 9 percent drop in Japan’s Nikkei 225 Stock Average and 5.5 percent slump in FTSE 100 Index.

Cardinal Health Inc. in Dublin, Ohio, the second-largest U.S. drug distributor by revenue, is up 5.6 percent, the third-most in the S&P 500 gauge of companies in the industry, since the Supreme Court upheld Obama’s health-care law. Madison, New Jersey-based Quest Diagnostics Inc., the biggest U.S. operator of medical laboratories, climbed 4.3 percent.

Health-care stocks in the S&P 500 have advanced 17 percent since the day before Congress passed the law, known as the Patient Protection and Affordable Care Act. That compares with an 18 percent increase for all companies in the full index and a 30 percent rally for a group of health insurers in the gauge.

Europe Crisis

While politicians debate the future of the law, investors are more interested in the effect Europe’s debt crisis will have on corporate earnings in the U.S., said E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia. His firm manages about $112 billion. Profits in the S&P 500 are projected to climb 7.2 percent this year and 12 percent in 2013, according to more than 10,000 analyst estimates compiled by Bloomberg.

The European Central Bank cut interest rates to a record low on July 5 and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession. Some “downside risks to the euro-area economic outlook have materialized,” ECB President Mario Draghi said at a press conference.

Earnings Season

“When you compare it to the debt crisis in Europe, when you compare it to worries about the labor market in U.S., when you compare it to the slowdown in the emerging economy, health care is just not as important to the market and you’re seeing that,” Greg Woodard, a strategist at Manning & Napier in Fairport, New York, which manages about $40 billion, said in a phone interview on July 5. “That just took a backseat.”

Alcoa Inc. in New York, America’s biggest aluminum producer, is due to begin the U.S. earnings-reporting season on July 9. Analysts project S&P 500 earnings will contract for the first time since 2010, dropping 1.8 percent from a year ago, according to data compiled by Bloomberg.

Republicans led by Boehner have contended the health-care law will raise taxes, destroy jobs and burden businesses with rules.

“Let’s stop payment on this check before it can destroy more jobs and put us in a deeper hole,” Boehner said during his floor speech in January 2011 when the U.S. House of Representatives voted to repeal the health-care overhaul. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said this month the law amounts to a tax on the American people and its repeal remains the party’s top priority.

Tax Reform

Norquist, president of Americans for Tax Reform in Washington, said the law includes a number of taxes such as a penalty starting in 2014 on companies with more than 50 workers that don’t meet government standards for affordable coverage. Such legislation may curb their willingness to hire during one of the worst economic recoveries on record, he said.

“The law will slow economic growth,” Norquist said yesterday in a phone interview. “It will be disastrous for hiring. It’s a direct tax on employment.”

Payrolls rose 80,000 last month after a 77,000 increase in May, Labor Department figures showed today in Washington. Economists projected a 100,000 gain, according to the median estimate in a Bloomberg News survey. The unemployment rate held at 8.2 percent. Joblessness has exceeded 8 percent since February 2009, the longest such stretch since monthly records began in 1948.

The S&P 500’s health-care index fell 0.7 percent to 436.09 today.

Limited Medicaid

While the 5-4 ruling on June 28 gave Obama an election-year victory by declaring that Congress had the power to make Americans obtain insurance or pay a penalty, the justices said an expansion of the Medicaid program for the poor went too far. They limited the law’s extension of Medicaid by saying the federal government can’t threaten to withhold existing funds from states that don’t fully comply.

Jonathan Golub, the chief U.S. market strategist at UBS AG, cut his forecast for the S&P 500 this year to 1,375 from 1,475 this week, citing a polarized political environment following the ruling, which makes it difficult for Republicans and Democrats in Congress to reach agreement on economic decisions.

Partisan Debate

“One of the most important catalysts for our changed view is the Supreme Court decision on health care, which we believe will result in a more partisan debate over end-of-year issues, such as the fiscal cliff and debt ceiling,” New York-based Golub wrote in a July 2 report to investors.

The fiscal cliff refers to about $607 billion of tax increases and spending cuts that kick in at the end of the year without action. Should lawmakers do nothing the economy may fall into a recession in early 2013, according to the Congressional Budget Office.

All six managed health-care providers in the S&P 500 slumped since June 27, falling 7 percent on average, amid concern new regulations may cut into profit margins with provisions banning insurers from discriminating against people with pre-existing conditions.

WellPoint Inc. in Indianapolis, the second-largest U.S. health insurer, sank 12 percent to $61.25 since June 28. Minnetonka, Minnesota-based UnitedHealth Group Inc., the biggest, declined 5.9 percent to $55.81.

Cheap Options

“Obama sees insurance companies as one of the adversaries and one of the problems with health-care costs,” Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, said in a telephone interview. The firm manages $3.7 billion and owns shares of WellPoint and UnitedHealth. “I don’t think it’s going to bother Obama if the prices of insurance companies go down.”

Options traders were paying the cheapest prices in 10 months to protect against swings in health-care stocks compared with U.S. equities before the court decision, according to data compiled by Bloomberg. Since then, the cost of puts relative to calls on the Health Care Select Sector SPDR Fund tumbled to its lowest level since August 2009 as investors boosted bullish bets on the exchange-traded fund, which tracks stocks such as UnitedHealth Group and Johnson & Johnson.

“I don’t think the market was concerned with over-regulation of health care at all,” Timothy Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York, said yesterday in an interview. He oversees about $2 billion. “We didn’t see it as a market-moving event. The market is dealing with other issues.”

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