Markets are bracing for the Supreme Court ruling on health care in the week ahead and it could be a positive catalyst for stocks if the new law is overturned.
But any pop is likely to be brief and the focus will return to Europe as the European Union leadership gathers to discuss a banking union at the end of the week. Early in the week, the focus will be on Greece’s efforts to restructure its bailout and Spain’s expected request Monday for funds to recapitalize its banks. There is also a stream of U.S. economic data, including durable goods, weekly jobless claims and consumer confidence readings.
The Supreme Court decision on President Obama’s health-care reforms could possibly come Monday but certainly by the end of the week. Some analysts say if the law is overturned, stocks could instantly spring into rally mode, though that could be short-lived since uncertainties remain. Health-care stocks have been moving higher ahead of the ruling on the Affordable Care Act, and were the best-performing sector in the past week, gaining 0.8 percent.
“The initial reaction (if overturned) will be that this is positive because it had a dampening effect on small business hiring and small business confidence,” said Barry Knapp, head of equity portfolio strategy at Barclays Capital. But he said any rally will be unsustainable. “It still leaves a block of uncertainty and that uncertainty also relates to the election results Is it positive for Romney? Is it positive for Obama? Both cases could be made. In the short term, it’s not going to move the market that much.”
Knapp said if health-care reform is not overturned, or just partially overturned, stocks could react negatively. “It’ not so clear what happens to the health-care sector stocks. I think the first reaction will be up, but you have to wonder about HMOs. There was a view they could have a much bigger customer base,” he said.
The justices are deciding whether Congress exceeded its authority by passing the law, which mandates individual health-care insurance. They could decide to throw out all of the law, part of it or keep it intact.
Analysts have said the market could read a ruling against the Affordable Care Act as a negative for Obama because he has invested so much personal capital in a law that could be deemed unconstitutional and the process has been disruptive across the economy. On the other hand, there is a sense a rejection could galvanize his supporters, a negative for GOP candidate Mitt Romney.
But the bigger driver of markets remains Europe’s debt crisis and expectations for the EU leaders’ summit are relatively low.
“We think what is likely is another half-hearted set of solutions to the problem,” said Pimco strategist Tony Crescenzi. He said one problem is there’s “bailout fatigue” on the part of creditors, and “austerity fatigue” on the part of countries that have to make tough choices to curb spending.
“At the margin, market participants expect some semblance of a banking union, given the recent turn of events in Spain,” he said. Crescenzi said there could be an FDIC-like deposit insurance scheme and a new approach to broader euro-zone banking supervision. Spain has been negotiating terms of a loan of up to 100 billion euros (US$125 billion) for its bank restructuring.
Crescenzi said a banking union is a first step ahead of a tighter fiscal and political union and all are required for the euro zone to create a common euro bond, seen as a necessary solution by many. But a meeting of the leaders of the four largest countries Friday ended with German resistanceto a common euro zone bond but an agreement on a 130-billion euro package to revive growth.
“There was a big view that this meeting was more important than the EU summit, and we see what they came up with — a fiscal package that’s one percent of GDP and we don’t know if it’s all new,” said Robert Sinche, global head of foreign exchange strategy at RBS.
He does not expect to see much progress on a banking union. “My guess is they’ll give it some lip service but to actually come up with a proposal and package at this point is very low probability,” said Sinche.
Wells Fargo Advisors chief equity strategist Stuart Freeman said Europe will remain the top focus for stocks.
“We’ll get choppiness as pieces of news come through. Europe is something we’re going to be working through on a quarter-to-quarter and probably year-over-year basis for quite a while. We see some programs that kick the can down the road a little but we really haven’t seen any solutions here yet,” said Freeman.
As stocks head into the summer and the start of the third quarter, analysts see other hurdles ahead that could also hold back gains, not the least of which is the slowdown in the U.S. economy. The Fed this past week downgraded its economic forecast through 2014 and extended its bond purchase program, “Operation Twist” through the end of the year.
Fed Chairman Ben “Bernanke pointed us to labor market data,” said Crescenzi. “That’s the most important thing.” Weekly jobless claims have been rising over the past several weeks, so that data on Thursday may be the most important of the week. Last week’s claims were in the survey week for the June employment report so economists are now forecasting another month of sub-100,000 job growth.
The Fed also fears the “fiscal cliff,” a combination of budget cuts and tax hikes that could go into effect in 2013 if Congress doesn’t take action. Analysts say that is one of their top concerns as well for the coming quarter, along with reaction to election news. Earnings could also start to weigh if companies trim their forecasts, as some have already done.
“I think we’ll get choppiness through the summer into the fall, and the move that takes us up into the 1400-plus range occurs at the end of the year,” said Freeman.
Knapp said investors seem to be coming around to acknowledging that the U.S. economy is stuck in a soft patch, evident in Thursday’s selloff.
“We remain bearish between now and August and think the market’s going lower,” he said. Knapp said the S&P 500 could hit 1200 before turning higher in the fourth quarter, in a post-election rally.
The S&P finished the week at 1335, down 0.6 percent. The Dow was at 12,640, down nearly a percent, but the Nasdaq rose to 2892, a 0.7 percent gain. Tech was the second best performing S&P sector, and the only other positive group after health care. It gained 0.3 percent on the week.
Knapp said he cut his 2012 earnings forecast for the S&P this week to $101 from $103. “We think the numbers are going to come down hard, in particular around 2013, but the fourth-quarter numbers for 2012 are way too high,” he said.
Earnings: Apollo Group
1000 am New home sales
1030 am Dallas Fed survey
Earnings: H&R Block
0900 am S&P/Case-Shiller home prices
1000 am Consumer confidence
1000 am Richmond Fed survey
0100 pm $35 billion 2-year note auction
Earnings: General Mills, McCormick, Monsanto, Commercial Metals, Paychex, Herman Miller, Progress Software
0830 am Durable goods
1000 am Pending home sales
0100 pm $35 billion 5-year note auction
EU Leaders Summit begins
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0830 am Initial claims
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1100 am Kansas City Fed survey
1130 am Cleveland Fed President Sandra Pianalto on housing
1200 pm Dallas Fed President Richard Fisher on the economy
0100 pm $29 billion 7-year note auction
EU Leaders Summit
Final trading day of 2 QTR
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0830 am Personal income
0905 am St. Louis Fed President James Bullard on economy
0945 am Chicago PMI
0955 am Consumer sentiment