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The "Fiscal Cliff," ObamaCare & the Supreme Court |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Preventing the “Fiscal Cliff” is a Tall Order 2. No, the Fiscal Cliff Will Not be a Big Deal 3. June 25: ObamaCare Hangs in the Balance 4. 68% of Americans Oppose ObamaCare 5. How the Court’s Decision Could Affect the Markets Overview Today we revisit the subject of the so-called “fiscal cliff” that our country faces at the end of this year if a Lame Duck Congress fails to pass a number of new laws by December 31. (I last wrote about this subject on March 27.) Some analysts are arguing that nothing really bad will happen if the Lame Duck Congress fails to get the job done. I disagree and I will tell you why below. As you may have already seen, I have been alerting clients that we could see a significant uptrend in the stock markets if the Supreme Court overturns ObamaCare as is expected by many on June 25. There are others, however, that do not believe the High Court will overturn ObamaCare, or at least not all of it. I will discuss this line of thinking as we go along. You may have read the two preceding paragraphs and assumed that this will be one of my weeks to go “political.” I beg to differ. With regard to the fiscal cliff, we are very likely facing a recession next year if the issues discussed below are not addressed by the end of this year. As to the fate of ObamaCare, it could have serious implications for the stock markets (and your 401-k/IRA), however the Supreme Court rules. Actually, all of this is much more than political. Preventing the “Fiscal Cliff” is a Tall Order I presume by now that most everyone reading this is familiar with the term “fiscal cliff.” But just to review quickly, here is what is set to happen on January 1, 2013 if nothing is done to stop it:
If these four things are allowed to happen, the economic damage to the economy would amount to at least $500 billion (I think it will be more), or some 3.8% of Gross Domestic Product at a time when GDP is struggling to grow by even 2%. The Congressional Budget Office recently estimated that if all the Bush tax cuts expire at the end of the year, the US economy will fall into recession in the first half of next year with negative GDP growth of -1.3%. That estimate doesn’t even take into account numbers 2. and 3. listed above. It now appears that there will be no effort in Congress to address the fiscal cliff issues listed above until after the election, which I think is very dangerous. The Lame Duck Congress will have less than seven weeks (if you subtract holidays) to address some or all the issues noted above before year-end. Most analysts contend that the danger of the fiscal cliff is not on the front burner with most Americans; instead they claim that it’s the European debt crisis that has investors’ attention. I would argue that the fiscal cliff is increasingly on the minds of investors and the general public. As an example, Fed Chairman Bernanke warned Congress repeatedly about the fiscal cliff in his testimony and comments last Thursday. This is a big deal, especially if Congress waits until November 7 to tackle it. Think recession. No, the Fiscal Cliff Will Not be a Big Deal To be fair, I should point out that there are some in the financial media who do not believe that the fiscal cliff will be a problem. Obviously, there are those who believe that the Lame Duck Congress will be successful in: 1) extending all of the Bush tax cuts, or at least most of them; 2) extending the 2% payroll tax holiday; 3) extending unemployment benefits; and 4) delaying the automatic spending cuts required by the Budget Control Act. If all of this gets done by December 31, I would agree. But with the angry partisanship within the Congress, there is no guarantee it will get done. Even if Congress can get it done, then there is the question of whether or not President Obama will sign the measures into law. Let’s take the Bush tax cuts, for example. A few weeks ago, Rep. Nancy Pelosi shocked politicos on both sides when she sent a letter to House Speaker John Boehner recommending that the House make permanent all of the Bush tax cuts for all Americans making less than $1 million a year. Wow! This is Nancy Pelosi after all. Over the next couple of weeks, several prominent Democrats got onboard as well. Even former President Bill Clinton weighed in last week, stating that he didn’t think income taxes should be raised on anyone (or spending cut) until the economy improves significantly. He even suggested that the economy is now in a recession. Oops!! A couple of days later, he reversed his position and apologized for differing with Obama. As this idea for making the Bush tax cuts permanent for those making up to a million dollars developed, I got the feeling that there might even be enough Republicans that could sign onto this plan to get it passed. There was an assumption that President Obama might even go along. However, last Wednesday the president’s Press Secretary made it very clear, that Obama would veto any tax plan that didn’t eliminate the Bush tax cuts for individuals making over $200,000 and families making over $250,000. Here we go again! Those who downplay the risk of the fiscal cliff seem to believe that even if the Lame Duck Congress doesn’t get everything done by December 31, then surely the new Congress will get it done in January or February, and make everything retroactive to January 1. That might sound good on paper, but that much uncertainty and fear will almost certainly be negative for the economy and the stock markets. If the Bush tax cuts expire, whether for everyone or just those making over $200K/$250K, income taxes will go up. Some argue (ignorantly) that taxpayers won’t feel the pain of higher tax rates until 2014 when they file their 2013 tax returns. That ignores the fact that withholding will go up on January 1 for those facing higher taxes. As noted above, the 2% payroll tax cut will also disappear, immediately affecting paychecks. Likewise, the capital gains rate will also increase significantly. If that looks likely near the end of this year, we could see a big increase in sales of assets that are subject to capital gains before year-end. I should also mention that there are several other temporary tax incentives that will expire at the end of this year if no action is taken by Congress and the president. These include a reversion to Clinton-era estate and gift tax rules, the so-called Medicare “Doc fix,” the AMT patch, etc. All of these will revert to more onerous levels if nothing is done by December 31. Finally, you may be asking why Congress and the president are intent on not taking action on any of these issues until after the election. Good question. In a nutshell, procrastination until after the election is (in a twisted way) the safest option because any resolution of these highly-charged issues beforehand will be very controversial on both sides. During the election campaign, both Democrats and Republicans want to emphasize their differences on tax and spending policies. Partisans view reaching a common agreement before the election as blurring distinctions that would otherwise be emphasized. If you find this disgusting, you’re right! They are risking a recession next year so they can get re-elected. June 25: ObamaCare Hangs in the Balance The Supreme Court is scheduled to announce its decision on the constitutionality of ObamaCare on June 25. There are three possibilities: 1) overturn it entirely; 2) overturn parts of the healthcare law; and 3) declare it constitutional and leave it alone. As this is written, the consensus is that the High Court will either overturn it entirely, or at least strike the “individual mandate” that everyone must buy health insurance. Most agree that eliminating the individual mandate effectively guts ObamaCare, because the program must have the healthy young people participate in order to help pay for the older folks. The mandate requiring every American to buy health insurance or pay fines clearly exceeds the federal government’s powers under the Interstate Commerce Clause found in Article I, Section 8 of the Constitution, at least in the minds of those who oppose ObamaCare. Their interpretation of the Commerce Clause is: The power to “regulate” commerce cannot include the power to “compel” commerce. Those who support ObamaCare feel otherwise and don’t want to limit federal power in any way. The Supreme Court heard oral arguments on ObamaCare for three days (March 26-28), and most observers agreed that the government didn’t do a very good job in presenting its case. As expected, the conservative justices questioned the constitutionality of the individual mandate. Several argued that if the government can make citizens buy healthcare insurance, then what’s to stop it from mandating that Americans buy other things as well. Even some of the moderate justices raised similar questions, along with Justice Anthony Kennedy who admitted that this was unprecedented territory for the High Court. Justice Stephen Breyer, who is expected to vote in favor of ObamaCare, made the case that the government should be able to “compel commerce” if it’s in the strong interest of the general public and it’s done within a market that affects everyone.
That was about the best argument the moderates could make. The discussions then focused on whether there are parts of ObamaCare that should be left intact, should the individual mandate be struck down. At the end of the arguments, it was impossible to know how the justices would vote behind closed doors (which probably has occurred already). So, how do the American people feel? The latest CBS/New York Times poll last week found that almost 68% of Americans want to see the Court strike down ObamaCare. That’s huge! I’m surprised CBS/NYT released their poll results. Yet in theory, the Supreme Court doesn’t rule based on public opinion polls, but they are likely to be aware of the negative public sentiment. Also, here is one poll that, while perhaps not affecting rulings, must get the attention of the members of the High Court. The latest CBS/New York Times poll shows that just 44% of Americans approve of the job the Supreme Court is doing. Fully three-quarters say justices’ decisions are sometimes influenced by their personal political views. The immediate question is whether the Chief Justice, John Roberts, understands the tenuous position of the Court he now runs. If he does, he’ll do whatever he can to avoid another 5-4 split on the upcoming decision over the constitutionality of the enormous and unpopular Obama healthcare law. In most 5-4 decisions, you have the four moderate justices voting one way, the four conservative Justices voting the other, and Justice Anthony Kennedy – the so-called “swing vote” – breaking the tie. This looks bad for a number of reasons because, essentially, Justice Kennedy decides which laws are constitutional and which are not in these 5-4 decisions. How Kennedy would vote on ObamaCare is not known, of course. Even though Kennedy was appointed by Ronald Reagan in 1988 as a conservative, he has often voted with the moderate justices on important decisions. However, Kennedy’s questioning during the oral arguments came as a surprise to many. He was the first justice to question the government’s argument that the Commerce Clause justifies the individual mandate. It remains to be seen how Kennedy comes down on ObamaCare. We’ll know in a couple of weeks. Chief Justice Roberts also questioned the government’s authority to require citizens to purchase health insurance. In one exchange, Roberts asked, “So can the government require you to buy a cellphone because that would facilitate responding when you need emergency services?” Justice Antonin Scalia took it a step further by saying, “… you can make people buy broccoli.” Ouch!
Because of the enormity of ObamaCare – apprx. 18% of the US economy – Chief Justice Roberts is, as noted above, expected to do everything in his power to avoid another narrow 5-4 vote. Because the individual mandate is so controversial, and nothing like it has never happened before in American history, most feel that Roberts should be able to get at least one of the moderate justices, along with Kennedy, to vote to strike down at least the mandate. Some believe the most likely moderate justice to vote against ObamaCare, or at least the individual mandate, is Justice Sonia Sotomayor who Obama appointed in 2009. During the oral arguments, she had some pretty tough questions for the government’s attorney. But that remains to be seen. On the other hand, some believe that Roberts will not be able to convince any of the moderate justices to vote against ObamaCare, leaving another 5-4 outcome as the result. Along this line, some have suggested that Roberts so wants to avoid a 5-4 on this one that he might switch his own vote to in favor of ObamaCare and try to convince Kennedy to join him in a 6-3 vote. I think the odds of that happening are zero. I don’t believe that Chief Justice Roberts would remotely compromise his conviction on this critical decision in order to avoid another 5-4 vote. That scenario is just wishful thinking on the part of some liberals that want ObamaCare upheld, in my opinion. Finally, if ObamaCare is upheld by the High Court, the opinion will almost certainly cite a prior opinion by Judge Laurence Silberman of the Court of Appeals for the District of Columbia – a Republican appointee with impeccable conservative credentials, who found the law to be constitutional. How the Decision Could Affect the Markets As noted above, the High Court is scheduled to announce its decision on June 25. Whether the Court rules to strike down ObamaCare entirely, or rules to leave it intact as is, I think it will have a significant impact, especially in terms of the stock markets and even the economy. As noted earlier, the consensus view is that the Supreme Court will strike down all or part of ObamaCare. I agree that is the most likely outcome. Yet as also discussed above, a vote to leave ObamaCare intact is not out of the question. Because of the sheer size of ObamaCare and the fact that the latest CBS/NYT poll showed that almost 68% of Americans want it struck down, the reaction to the Court’s decision – whichever way it goes – will almost certainly spark some big moves in the markets. Let’s take a look at both potential outcomes. Let’s first take the option that the Court strikes down ObamaCare in its entirety, or rules that the individual mandate is unconstitutional – either of which would effectively end the program. I happen to believe that such a decision would be quite bullish for the stock markets. Why? There are several reasons. Given that nearly 68% of Americans want ObamaCare struck down, it could be a big boost to consumer confidence and therefore consumer spending if the Supreme Court finds it unconstitutional. Consumer spending, after all, accounts for over two-thirds of GDP. So if the High Court rules that ObamaCare, or even the individual mandate, is unconstitutional, it could create a significant updraft for the stock markets, since it will remove a number of uncertainties for millions of small businesses. If the Supreme Court rules that all of ObamaCare is constitutional, then I would expect the opposite to occur. With 68% opposing this outcome, the reaction from the public will almost certainly be negative. Consumer confidence could fall further, and the stock markets could decline. I don’t expect this outcome, but it can’t be ruled out. I have been advising clients to use stock market pullbacks ahead of the June 25 Supreme Court announcement as an opportunity to add to their accounts, in anticipation of a rally after the ObamaCare decision is known. If you are on the sidelines, consider any pullbacks just ahead as a possible opportunity to get back in. One caveat, however: my suggestion to get back in the market is premised on the assumption that you do so in professionally managed strategies such as those we recommend at Halbert Wealth Management. I do not recommend that you buy passive index mutual funds. The two professionally managed programs I have recommended recently are Yacktman Capital Group and Wellesley Investment Advisors. Now may be a good time to consider these and other programs we recommend. Feel free to call us for more information at 800-348-3601. We’ll know in two weeks, one way or the other. Blog Note: If you want to keep up with my latest thinking in these uncertain times, you need to read my weekly Blog. If you have not signed up to receive my weekly Blog, that means you’re missing key information that is not included with my weekly E-Letters that go out on Tuesdays. My Blog is free and I encourage you to sign up today. To read my latest Blog, click here. Wishing you a summer of fun,
Gary D. Halbert SPECIAL ARTICLES
Fiscal impasse to last until after the election
Highlights from Supreme Court arguments on ObamaCare
Obamacare decision could rally markets
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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent. |
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