Measuring the Effects of Affordable Care Act, a.k.a. Obamacare

The Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA) or “Obamacare,” has been at the center of the recent government shutdown and debt ceiling debates as well as a source of controversy in the media. In order to better understand the issues, let’s delve past the hype and discuss how Obamacare may affect investors and the economy.

What is Obamacare?

Obamacare is a set of health reforms that was passed by Congress and signed into law in March 2010. Considered the biggest extension of federal health care benefits since the establishment of Medicare and Medicaid in 1965, Obamacare will let some 47 million Americans who currently lack insurance to purchase various types of government-sponsored health coverage. The stated purpose of the bill is to increase the number of Americans covered by insurance and decrease the cost of health care in the U.S.

The centerpiece of the health reform bill are the insurance exchanges, where people who do not currently have health insurance will be able buy it. The insurance marketplaces opened for enrollment on October 1, 2013 and the ACA will begin delivering insurance coverage on January 1, 2014. Among other important changes, Obamacare also bars insurance companies from denying benefits based on pre-existing medical conditions like pregnancy, cancer, or disability. Insurers must also justify any insurance premium increase over 10 percent.

Most Americans may not be directly affected by Obamacare. If you’re one of the 80 percent of Americans who get insurance through an employer or the government, it’s very unlikely that you’ll ever directly interact with Obamacare’s insurance exchanges. Obamacare matters most for the 20 percent of Americans who are uninsured or purchase individual private (non-group) insurance. Source: Washington Post Blog

Why is Obamacare controversial?

The ACA has drawn a significant amount of opposition and most of the controversy is due to a fundamental disagreement about the idea of universal health insurance. Opponents to the law think that Obamacare will lead to the disruption of existing health plans, increase the costs of insurance, and result in higher costs to businesses and employers.

There is also opposition to specific aspects of the new regulations, such as the employer mandate, a penalty that will be incurred by businesses with more than 50 employees that do not offer health insurance to their full-time workers. Some economists worry that this provision will act as an incentive for employers to substitute part-time workers, thus having an adverse effect on the labor market. Although the employer mandate has been delayed until 2015, there is already evidence to suggest that some employers are cutting worker hours to avoid falling under ACA provisions.

What does Obamacare mean for investors and the economy?

According to estimates prepared by the Congressional Budget Office (CBO), Obamacare will reduce the federal deficit by $210 billion over the 2012-2021 period because revenue will significantly exceed expenses. A major source of revenue will be higher Medicare taxes, new annual fees on health insurance providers, pharmaceutical companies, and drug manufacturers, a new 40 percent excise tax on so-called “Cadillac” insurance policies, and reductions in Medicare reimbursements for hospitals that don’t meet standards of care. The CBO also believes that the ACA will also extend the solvency of Medicare by an additional 8 years.

On the other hand, economists lack a clear understanding of the effects provisions, like the employer mandate, will have on the labor market, or how Medicare reimbursement rates will affect the healthcare industry. It’s likely that these effects won’t be visible for years.

When attempting to understand how Obamacare may affect you as an investor, it’s important to keep your personal political views in check. Regardless of your opinions about the ACA, there are some objective conclusions that we can draw about how different sectors may be affected:

• Approximately 50 million new health care consumers will be created and demand for medical services and equipment is likely to rise as a consequence. 
• Hospitals will no longer be on the hook for free emergency room care, meaning that they will be able to drastically reduce unreimbursed patient-service costs. 
• Insurance companies will see their earnings and profitability affected by ACA provisions as well as by the addition of previously uninsured Americans. 

Conclusions

It’s impossible to know exactly how the ACA will affect markets, but we know that new regulatory environments often provide opportunities for flexible investors with a long-term outlook. In the short term, uncertainty around the ACA rollout and political debates may lead to increased volatility; however, we encourage our clients to focus on their long-term objectives and not to worry too much about short-term market movements.

We hope that you’ve found this post interesting and informative. If you have any questions about the information we’ve presented or want to know how the ACA may affect your investments, please let us know; we would be happy to discuss your concerns. As always, it is our sincere pleasure to be of service.

Perspectives from Above the Noise – Week of October 28, 2013

3 Stories in the global economy that should not go un-noticed

After a delay of several weeks, investors finally got a look at September’s jobs report and the news was mixed. While the unemployment rate dropped to 7.2%, hiring appears to have slowed. On a more positive note, third quarter earnings have been slightly better than expected with earnings growth averaging 6.8% among the 243 S&P 500 companies that have already reported in. 

Markets extended their post-deal rally for another week, putting up several new records: The S&P 500 closed out the week at another all-time high, while the Nasdaq ended at a 13-year high. No records yet for the Dow, but it’s putting up a good fight, gaining 5.4% over the last 13 trading sessions.

For the week, the S&P 500 gained 0.88%, the Dow increased 1.11%, and the Nasdaq grew 0.74%.

Here are the 3 stories this week that rose above the noise:

Silicon Valley: Feel the Froth

An article from The Wall Street Journal details some signs of excessive speculation beginning to take hold in the technology sector. A number of highly speculative companies with soaring valuations are discussed, an indication that investors’ willingness to take on risk in an effort to generate large gains is reaching potentially concerning levels.

As the authors note, market frothiness remains well below the mania witnessed during the late-1990s, but recent speculative activity could be an early indication that investor psychology has become overly exuberant.

Business Confidence Booms, While Consumer Confidence Slumps

Business confidence is improving among chief financial officers, according to a CNBC survey of CFOs from multinational corporations located in Europe and Asia. Nearly 70 percent of the respondents anticipate an improvement in the global economy over the next six months and only 9 percent foresee a decline in economic growth. Additionally, 56 percent of respondents plan on expanding their workforce and 4 percent plan to implement layoffs within the next six months. The biggest concern over the next six months mentioned in the survey is slowing growth in emerging-market economies. Over 80 percent of respondents mentioned it as a concern.

Meanwhile, consumer confidence slumped according to yesterday’s Conference Board report, which showed a decline in its index to 71.2 from a revised 80.2 last month. It is a disappointing number considering the median forecast in a Bloomberg survey of economists was 75.

The partial government shutdown contributed to negative sentiment in both present conditions and consumer expectations for the next six months. More Americans expect their income to decline over the next six months which coincides with less Americans planning to buy homes and cars. Real-estate sales have begun to ease as higher prices and mortgage rates sideline potential homebuyers.

U.S. Housing Recovery Continues

Home prices in 20 U.S. cities rose in August from a year ago by the most since February 2006 as stronger demand boosted values. The S&P Case-Shiller index of property prices increased 12.8 percent from August 2012, after a 12.3 percent gain in the year ended in July.

The ongoing housing recovery continues to be a source of strength for the U.S. economy especially given the headwinds created by lower government spending due to the sequestration deal struck in Congress late last year. Economists noted that every area reported higher selling prices indicating broad participation in the recovery. As of August, average home prices in the U.S. were back to mid-2004 levels and the 20-city index was up 22.7 percent from its March 2012 low.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Washington Fuels the “Creation of Crisis”

It didn’t have to be this way. The latest government crisis in Washington continued to reduce confidence in our elected leaders. I have a phrase I use to suggest the media’s psychological influence on the behavioral way we approach our money and investing—and that is “the Creation of Crisis”. I have made the suggestion on this blog before that Behavioral finance, or balancing fear and greed with a long-term investment strategy, is something each of us struggle with, and 24-hour news television sometimes only adds one more irrational voice in our heads. Well, the media certainly did their part to scare folks as Thursday drew nearer, but the politicians didn’t need much help.

Much of the political wrangling as these deadlines come to pass is focused on the a raise of the “debt ceiling”. This is money that the government has already spent. In my opinion, if there is an argument to be made it has to be about getting future spending in line with current tax revenues—and working on a reform to bridge this gap. This was not done, and here’s more bad news: the deal passed last week maintains the sequester and only funds the government through January 15 and raises the debt ceiling until February 15.

Unfortunately, kicking the can down the road means that we’ll be revisiting the issue again after the New Year. There’s a tremendous amount of mistrust not only between the parties, but also within the Republican Party, meaning that the next fiscal showdown may be just as acrimonious and drawn out.

An eye-popping new report suggests that Congressional budget battles, debt ceiling standoffs, and federal spending cuts have cost the country nearly 3% of GDP growth since 2011 – roughly $700 billion in lost economic growth. Digging a little deeper into the numbers, we discover that spending cuts alone have taken a significant chunk – 0.7% - out of annual GDP growth since 2010. Worse, this is an annual reduction in GDP growth, meaning the effects compound over time.[i]

If the current budget battle morphs into a protracted series of short-term arrangements, raising policy uncertainty in the process, the economy will likely suffer as well. Focus of the argument can and should shift to pragmatic solutions with political consensus.


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[i] http://www.macroadvisers.com/2013/10/the-cost-of-crisis-driven-fiscal-policy/

Perspectives from Above the Noise – Week of October 21, 2013

3 Stories in the global economy that should not go un-noticed

Markets experienced one of the best weeks in months, with the S&P 500 setting a new high after lawmakers finally struck a deal in Washington. An agreement was finally reached last Wednesday to reopen the government, raise the debt ceiling, and avert a default on U.S. debt. The deal came on the 16th day of the shutdown and just one day before the U.S. Treasury would have hit the debt ceiling and exhausted its ability to borrow money.

For the week, the S&P 500 gained 2.42%, the Dow gained 1.07%, and the NASDAQ gained 3.23%.

Here are the 3 stories this week that rose above the noise:

Live From New York! It’s Jobs Tuesday!

The Wall Street Journal blog did a nice job of dissecting today’s jobs report. Overall, the economy added 148,000 jobs in September, well below the consensus 180,000 expectation and below the 185,000 monthly average for the prior 12 months.

However, the effects of the government shutdown will not be apparent until next month’s report and as such it is likely that today’s report will not materially influence the Fed’s decision at its October 29-30 meeting. Gold prices spiked to a three-week high as taper expectations are likely pushed out further. Similarly, the U.S. dollar continued its slide against major currencies.

Holiday present: $3.15 a Gallon Gas by Christmas

Although recent domestic economic data has been mixed at best and may be further slowed by the recent partial government shutdown, one positive that may provide a boost is falling gasoline prices. As detailed in this USA Today article, gasoline prices may continue sliding into the holiday season based on recent supply data and normal historical tendencies.

Gasoline prices are now 13 percent lower than a year ago, which is a magnitude of decline that has not happened often over the past 10 years and should provide some boost to consumer spending in the coming months.

Sales of Existing U.S. Homes Fall as Affordability Drops

Rising mortgage rates are beginning to impact the U.S. housing market. Sales of existing homes eased in September, declining by 1.9 percent to a seasonally adjusted annualized rate of 5.29 million. Additionally, existing home sales in August were revised downward, but still remained at a four-year high.

The average sales price increased by 11.7 percent over the previous year, mainly from continued tight supplies in the housing inventory. If mortgage rates and housing prices continue to climb, housing affordability could slow the housing recovery. However, the current national average for a 30-year mortgage is 4.28 percent, which is still low by historical standards.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of October 14, 2013

3 Stories in the global economy that should not go un-noticed

The market experienced another tumultuous week as investors responded to fear about the looming debt ceiling and hope about a possible resolution. The government shutdown continued for another week, reaching its 11th day on Friday. Currently, about 500,000 federal employees are still furloughed, after many essential personnel were returned piecemeal to their jobs.

Despite the volatility, markets rebounded on Friday as hopes of a deal circulated in the media. For the week, the S&P 500 gained 0.75%, the Dow increased by 1.09%, and the NASDAQ lost 0.42%.

Here are the 3 stories this week that rose above the noise:

Greek Bond Yields Hit Post-Crisis Lows

Most recent evidence suggests that the Eurozone economy continues to emerge from its prolonged contraction, with the latest composite leading indicator readings showing a mild acceleration in economic momentum. An additional piece of evidence that suggests that near-term risk of a renewed European sovereign debt crisis has diminished is the yield on Greek debt, which has recently hit multi-year lows. A recent Financial Times article details the signs of stabilization in the troubled country, which provides further evidence that the Eurozone recovery appears to be gaining momentum.

40 Years after OPEC Embargo, U.S. Energy Is Giant

The growth in U.S. production of oil and natural gas over the past few years has received much attention and a Bloomberg article traces the roots back to the OPEC embargo which began 40 years ago. In addition to some good historical perspective on how U.S. energy supply has evolved, the article provides some interesting facts detailing how the risk of an energy supply shock for the U.S. has been reduced over the past 40 years.

More importantly, the article also outlines why the United States is likely to continue to become more energy independent in the coming decade, a very positive development which helps to offset some of the secular headwinds the country faces from demographic and debt concerns.

Low Gasoline Prices May Put $30 Billion in Consumers' Wallets

U.S. consumers are finally getting some relief at the pump. Gas prices are at their lowest level since January and have dipped below $3/gallon in some areas of the country. Overall, the national average is $3.34/gallon, which is 50 cents lower than 12 months ago.

The boost to consumers from lower gas prices may add as much as 0.2 percentage points to fourth-quarter GDP, according to economists at RBC Capital Markets. Gas prices have fallen from a combination of increasing supply of oil and lower demand following the end of the peak summer driving season.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of October 7, 2013

3 Stories in the global economy that should not go un-noticed

The big news last week was that the federal government shut down on Tuesday, October 1 when Congress would not pass a 2014 budget bill. Since many federal agencies require their funding to be renewed each fiscal year, they were forced to shut down, furloughing 800,000 federal workers, and causing disruptions in services across the country.

So far, markets have largely shrugged off the shutdown as part of business as usual in D.C. However, as we head into the second week of the federal shutdown, uncertainty is rising. Currently, Congress appears to be at an impasse, and while the shutdown will have limited effects on our $16 trillion-plus economy, investors are starting to worry about the debt ceiling and a possible U.S. default.

It’s important to keep the current situation in perspective. There have been 17 federal government shutdowns since 1976 and none have resulted in long-term damage to markets; in fact, on average, markets had gained 1.1% one month after the end of the shutdown, as investors took advantage of the selloff. While the past doesn’t predict the future, it’s important to note that we’re not in uncharted waters yet and the long-term effects of previous shutdowns have been negligible.

Markets finished last week slightly down—the S&P 500 fell 0.07%, the Dow lost 1.22%, and the Nasdaq increased by 0.69%.

Here are the 3 stories this week that rose above the noise:

IMF Cuts Global Outlook

The International Monetary Fund (IMF) cut its global growth outlook for this year and next and warned that a U.S. government default could damage the world economy. The IMF now expects global growth to total 2.9 percent this year and 3.6 percent next year compared with its July predictions of 3.1 percent this year and 3.8 percent for 2014. It sees emerging market economies growing at 4.5 percent this year, 0.5 percent less than three months ago.

Positively, the IMF acknowledged that Europe is coming out of its recession and the United States continues to benefit from its ongoing housing recovery. Elsewhere, Ned Davis Research projects a very low chance of recession in the United States (less than 1 percent probability based on individual State conditions) and only a 27 percent chance of a global recession.

Money Talking: The First Economic Victim of the Shutdown

Rana Foroohar of Time highlights the potential negative impact the government shutdown may have on the housing recovery. A large percentage of employees in the Federal Housing Administration are currently furloughed, which may create a bottleneck in the mortgage process and slowdown the housing recovery.

Additionally, lenders need to process data through the Social Security Administration, IRS and HUD. According to Mortgage Bankers Association David Stevens, there is “confusion and fear among borrowers about whether they will be able to close on a home purchase or refinance.”

A Lonely Housing Bear Predicts a Big Tumble

In a sign of just how much sentiment toward the housing market has reversed in the past few years, a Bloomberg article details one of the few widely followed real estate analysts that currently has a bearish outlook.

Although we do not view his prediction of a 20 percent broad-based decline in housing values as a likely outcome and we remain somewhat optimistic about the housing recovery, the issues discussed in the article are potential headwinds worth considering and the skepticism surrounding any bearish arguments suggests investor sentiment may have become a little too optimistic about the outlook for home price appreciation.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of September 30, 2013

3 Stories in the global economy that should not go un-noticed

Markets have been volatile in the last weeks of the 3rd quarter, roiled by renewed budgetary debates in Washington as Congress struggled to approve a 2014 budget before yesterday’s deadline. The US Government is currently closed for business.

Markets finished last week slightly down—the S&P 500 fell 1.06%, the Dow lost 1.25%, and the Nasdaq increased by 0.18%.

Here are the 3 stories this week that rose above the noise:

Is the Pump Primed for Emerging Markets Investors?

Emerging market equities have significantly underperformed the developed world over the last year due to global growth concerns and geopolitical tensions. However, we have recently seen a reversal of the prior trend. Mark Mobius, an emerging-markets fund manager at Franklin Templeton Investments, provides the following commentary supporting investing in this area.

Currency appreciation, fiscal strength (lower debt/GDP), growth prospects, and global economic recovery and monetary expansion highlight Mobius’ list of bullish arguments favoring emerging markets. “I’m not saying everyone will or should increase their allocations to emerging markets, but I think that many could very well rebalance their portfolios as market sentiment should improve.”

After the Shutdown, What Can We Expect?

With a government shutdown upon us, it’s worth pondering this drama’s endgame. Does anyone seriously think Democrats in the Senate or the White House will abandon the president’s signature legislative accomplishment in order to appease a few dozen congressional Republicans with an appetite for hyperbole?

An op-ed from Bloomberg reviews some of the aspects of the U.S. government shutdown. Many pundits believe the shutdown will have a limited impact as long as it is short-lived. History supports this conclusion as the S&P 500 fell only 3 percent-4 percent during the shutdown of 1995-1996 and eventually went on to rally considerably further.

Consumer Spending in U.S. Climbs 0.3% as Incomes Pick Up

Consumer spending increased for the fourth consecutive month in August, rising by 0.3 percent according to the Commerce Department. The modest gain in consumer spending was supported by a 0.4 percent gain in personal income, the largest improvement in six months. Consumer spending, which accounts for roughly 70 percent of the economy, will need to advance at a faster pace in order for the U.S. economy to break out of its four-year trend of slow economic growth.

Negatively, consumer confidence contracted in September, which provides an additional headwind for consumer spending. Additionally, the government shutdown will most likely negatively impact household spending if the shutdown lasts for a prolonged period of time.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.