Favorable Policy Environment for Stocks in 2015

December 8th Weekly Market Update

We expect the policy environment in 2015 to be supportive for stocks. As discussed in our Outlook 2015: In Transit, Republican control of Congress sets up a different policy dynamic in Washington that could have a meaningful impact on broad policy measures such as the Affordable Care Act (ACA), tax reform, the federal budget, and regulations in certain sectors such as energy and financial services. President Obama’s interest in building a legacy may lead to more compromise between the White House and Congress than seen in recent years.

Here are our thoughts on the key policy issues for the rest of 2014 and through 2015:

ƒƒ ACA. The president’s signature policy initiative, the ACA (also known as
Obamacare), is unlikely to be repealed next year, although there is a strong
chance that the most unpopular parts of the law will be repealed. The
impending Supreme Court ruling in mid-2015 about the legality of ACA
subsidies affecting more than 7 million subscribers may force the Obama
administration to work with Congress to make significant changes to
the law. We would view any ACA-driven weakness as a potential buying
opportunity in the healthcare sector, and we are watching for opportunities
to take advantage of attractive growth prospects and strong innovation
momentum.

Tax reform. Broad tax reform, which would likely take the form of closing
corporate, personal, and other tax loopholes while lowering the overall tax
rate, would be welcomed by markets. However, the Republican majority
in the Senate is not large enough to deliver more than piecemeal changes
at this point. Bipartisan agreement exists to lower the corporate tax rate;
however, without a filibuster-proof Republican majority in the Senate
in 2015, the path to accomplishing this is murky. The Republican win in
the runoff election in Louisiana this weekend brings the total Republican
Senate seats to 54, short of the 60 needed for a filibuster-proof majority.

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