The lower house of congress in the US has just approved the Healthcare Bill that the senate had approved recently. This has not been priced into the market with a very high probability, at least not with this timing. Futures (that trade overnight) is showing the S&P500 at -0.8%. The negative interpretation markets seem to take of this event is not only based on the merits (or lack thereof), but on what this legislative success means for the Democrats’ reform agenda.

The Healthcare Bill is 1300 pages long, and nobody really believes the medium-term end product is what has just been voted (due to future amendments, etc.). Moreover, the large fiscal implications only materialize through time. What the market is bound to re-price is the probability that other reforms get through, like financial reform, cap and trade, etc. These reforms are perceived as an increase in the size and influence of the government, and as such a drag on growth.

We believe the moral and social merits of this reform exceed those of its design. We also believe it is very difficult to estimate its final economic impact, given that we believe its flaws will be worked on in future amendments or reforms. Thus, we believe the S&P could suffer this week a transitory decline of 2-5% (not an easy estimate).

Our portfolios have about 12% cash at the moment, less than 8% in the S&P500 (though the total exposure to equities is in the 20-30% range, globally).

We see the other reforms in the President’s agenda have a lower probability of passage, as they lack the moral and social merits of this one. This is just a quick note given what has happened over the weekend.

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