The Second Step: Supreme Court
First Trust Advisors
By Brian Wesbury, Robert Stein
June 25, 2012
Step Two of our Four Steps to Recovery will happen sometime this
week. The wait for the Supreme Court to issue its decision on whether
President Obama’s health care reform law is constitutional is almost
over.
“Obamacare” is the president’s signature legislative achievement. His
legacy largely hinges on how the case is decided. If the law is fully
upheld and if the president wins re-election, the odds of fully
implementing the law go way up. In combination, these two events would
codify the US’s move toward a cradle-to-grave social welfare state
(emulating much of Europe). This would reduce the growth potential of
the US economy and further diminish price-earnings ratios.
As of right now, before the Court issues its decision, we think
this combination is highly unlikely. Much more likely is the Court
striking down the mandate to buy health insurance as well as other parts
of the law that go with the mandate, like the requirement that
insurance companies cover all applicants, with no price difference based
on health status.
It is entirely possible the Court strikes down the entire law. Oral
arguments suggested that the Court understood striking down a major
feature of the health care law and letting the rest stand would, in
effect, re-write the law in a way Congress never intended. In other
words, striking down all the law could be a more restrained decision
than striking down just part of it.
If the Court lets most of the law stand, the voters would still get
a chance to throw out the rest. Right now, 61% of Americans oppose the
mandate, while at the same time supporting other parts of the bill. A
new Senate and House, and possibly a new President could use the same
special budget procedures that were used to enact Obamacare to repeal
what was left. Even if the GOP does not sweep all races, the law is so
unpopular that many parts of it could likely change.
In other words, right now the path to getting the law fully
implemented is very narrow. Equity markets do not seem to realize
this. Neither do businesses that seem to be holding back on investment
and hiring decisions temporarily because the Supreme Court ruling is so
close. If the Court starts the ball rolling by declaring the mandate
unconstitutional, look for the economy and stock markets to take a sharp
turn for the better.
Supporters of bigger government and higher taxes have lusted after a
federally-dominated national health care system for multiple
generations. Losing now, after they had a supportive president and a
filibuster-proof majority in the Senate would be demoralizing.
By contrast, the advocates of smaller government and lower taxes
would have the winds at their backs. It would be the second step of what
we are calling the Four Step Process to Recovery. The first step was
Governor Scott Walker’s recent victory in Wisconsin. Although many
governors of both major parties have taken on government unions, the
unions decided to make Walker the poster child and lost badly.
So, step two would highlight a shift in the direction of the American political environment.
In the late 1960s and 1970s, the Great Society programs of
President Johnson moved the US to a bigger government. Equity markets
went nowhere for 17 years. Then government shrank substantially under
Reagan and Clinton, and equities soared once this process got underway.
The stage is being set for government to shrink once again. And, if so, equities are exactly the place to be.
Step Two of our Four Steps to Recovery will happen sometime this
week. The wait for the Supreme Court to issue its decision on whether
President Obama’s health care reform law is constitutional is almost
over.
“Obamacare” is the president’s signature legislative achievement. His
legacy largely hinges on how the case is decided. If the law is fully
upheld and if the president wins re-election, the odds of fully
implementing the law go way up. In combination, these two events would
codify the US’s move toward a cradle-to-grave social welfare state
(emulating much of Europe). This would reduce the growth potential of
the US economy and further diminish price-earnings ratios.
As of right now, before the Court issues its decision, we think
this combination is highly unlikely. Much more likely is the Court
striking down the mandate to buy health insurance as well as other parts
of the law that go with the mandate, like the requirement that
insurance companies cover all applicants, with no price difference based
on health status.
It is entirely possible the Court strikes down the entire law. Oral
arguments suggested that the Court understood striking down a major
feature of the health care law and letting the rest stand would, in
effect, re-write the law in a way Congress never intended. In other
words, striking down all the law could be a more restrained decision
than striking down just part of it.
If the Court lets most of the law stand, the voters would still get
a chance to throw out the rest. Right now, 61% of Americans oppose the
mandate, while at the same time supporting other parts of the bill. A
new Senate and House, and possibly a new President could use the same
special budget procedures that were used to enact Obamacare to repeal
what was left. Even if the GOP does not sweep all races, the law is so
unpopular that many parts of it could likely change.
In other words, right now the path to getting the law fully
implemented is very narrow. Equity markets do not seem to realize
this. Neither do businesses that seem to be holding back on investment
and hiring decisions temporarily because the Supreme Court ruling is so
close. If the Court starts the ball rolling by declaring the mandate
unconstitutional, look for the economy and stock markets to take a sharp
turn for the better.
Supporters of bigger government and higher taxes have lusted after a
federally-dominated national health care system for multiple
generations. Losing now, after they had a supportive president and a
filibuster-proof majority in the Senate would be demoralizing.
By contrast, the advocates of smaller government and lower taxes
would have the winds at their backs. It would be the second step of what
we are calling the Four Step Process to Recovery. The first step was
Governor Scott Walker’s recent victory in Wisconsin. Although many
governors of both major parties have taken on government unions, the
unions decided to make Walker the poster child and lost badly.
So, step two would highlight a shift in the direction of the American political environment.
In the late 1960s and 1970s, the Great Society programs of
President Johnson moved the US to a bigger government. Equity markets
went nowhere for 17 years. Then government shrank substantially under
Reagan and Clinton, and equities soared once this process got underway.
The stage is being set for government to shrink once again. And, if so, equities are exactly the place to be.
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
(c) First Trust Advisors
www.ftportfolios.com
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