Weekly Commentary for July 2, 2012
While the first quarter of 2012 beat expectations, the second quarter poured cold water on investors’ hopes for a strong encore. Much like the last two years, the economy got off to a solid start only to falter in the spring. Despite a strong showing in the latter half of June, markets are down for the quarter, erasing some of the gains we saw in Q1. However, the major indices are still up significantly for the year. Since January 1, 2012, the S&P has gained 8.31%, while the Dow is up 5.42%, and the Nasdaq grew by 12.66%.[i]
What are some of the factors that contributed to the Q2 doldrums? Most can be grouped into two major categories:
1. Global economic turmoil
Concerns about the European debt crisis continued to dominate headlines this quarter, as lawmakers struggled to contain a rapidly growing crisis that threatens the integrity of the entire Eurozone. Greece skirted the edges of a disorderly default on its debt as popular opinion rose against punishing austerity measures. Although voters elected a pro-bailout coalition government, it is still unknown whether Greece will remain in the Eurozone. The Spanish were able to secure bailout funds to recapitalize their struggling banks from a centralized bailout fund as the Eurozone gambles on a more centralized union to save itself.[ii]
China, the world’s second-largest economy is decelerating; its central bank is desperately trying to cushion the landing as China’s manufacturing and export sectors – major drivers of the Chinese (and global) economy – slow.[iii]
2. Concerns about domestic growth
Investors and analysts are worried about troubling economic reports this quarter that suggest the U.S. economy might be slowing. Stubborn unemployment, slow economic growth, and a stagnant job market continue to undermine confidence. One bright spot is that falling oil and gas prices offer consumer pocketbooks a break, and may encourage Americans to boost spending, the primary driver of economic expansion.
Taking into consideration the upcoming presidential election and expiration of the so-called Bush Tax Cuts in January, it’s no wonder many analysts expect a period of sustained volatility in the months ahead.[iv] With this in mind, we encourage you to stick to an investment strategy that is suitable for your own risk tolerance and personal investment objectives. Every individual has unique needs, and we always strive to match our clients to appropriate solutions to fill those needs. If you have any questions or concerns, please don’t hesitate to call your Denver area financial advisor Jordan Dechtman, at 303-741-9772 or email him at Jordan@JordanDechtman.com.
Brief: ‘Obamacare’ Supreme Court Decision
Big news last week was the Supreme Court’s historic move to uphold the president’s Affordable Care Act that will impact the way Americans receive and pay for medical care. What does this move mean for the general public, and for investors?
Broadly, the ACA stipulates that millions of people not currently covered by health care will have insurance by 2016. The Supreme Court upheld the individual mandate, meaning that by 2014, uninsured Americans must purchase insurance, or face a fine. Additionally, prior to the ACA, insurers could cherry-pick their insured, excluding those with pre-existing conditions; the new law prohibits insurance companies from excluding pre-existing conditions, and allows people to purchase insurance from state insurance exchanges.[v]
Winners: (Note: We are not recommending any investments here, just sharing some information.)
- Hospitals: Hospital stocks jumped sharply after the Supreme Court ruling. Hospitals gain by having to provide less free care for the uninsured; currently, 25% of the care provided by hospitals goes unpaid, an amount that will decrease substantially under the new law. Hospitals also stand to gain additional business from the estimated 33 million people that will be added to the rolls of the insured.
- Insurers: Although many insurance stocks dipped after the ruling, it’s possible they were overbid on expectations that the Supreme Court would throw out the individual mandate or the entire ACA. Insurers stand to gain under the individual mandate provision by not having to pick up the tab for the uninsured. Additionally, by getting millions young of people into the risk pool, insurers will be able to offset the expense of insuring older Americans.[vi]
- Medical Device Makers: Among the losers are medical device makers, who will be responsible for an excise tax of 2.3% on the sale of medical devices, expected to add $29 billion to federal coffers over the next 10 years.[vii]
- Large Employers: Other losers could be employers (with more than 50 employees) who do not provide insurance to employees; they stand to pay a fee of $2,000 per full-time employee.[viii]
- Wealthy Taxpayers: Medicare payroll taxes will increase for some high-income earners, and a new Medicare surtax will be levied on investment income. Investors who think they may fall into these categories should feel free to speak with us about strategies to help mitigate these taxes.