After a year of fierce debate, President Obama signed into law Tuesday a sweeping overhaul of the U.S. health-care system. Although many of the law’s provisions won’t kick in until 2014 as well as face a legal challenge from dozens of states’ attorneys generals, the new law is already moving the market. This week, many health-care related companies witnessed gains after the House passed the bill on Sunday. Here’s why two brokers think investors are in for a mixed bag now that a system of universal health care is the law of the land:

Who’s Talking: Jeffrey Kleintop, Chief Market Strategist, LPL Financial

The Gist: The wavering health of the stock rally and the passage of the health-care legislation may combine to result in another stock market pullback. However, in the end, promising economic conditions and improved profit growth should prevail.

Within the health-care sector, the impact will likely be mixed, says Kleintop. Health maintenance organizations, HMOs, for example, may witness losses, while hospital companies, along with other beneficiaries of increased health care volumes, will likely benefit. But then again, much of this impact has already been priced into the market, he says.

The real story here lay in the tax and deficit impacts of the legislation, which could level a hurt to the broader market. In fact, investors could see another 5% to 10% stock market pullback thanks to the new law, Kleintop says. Here’s why: The legislation imposes a new 3.8% tax on investment income. In addition it adds a 0.9% tax on wages for those earning more than $250,000, set to take effect in 2013.

What’s more, various subsidies and safety nets offered under the new law could cause the deficit to balloon. Potentially 127 million people could be eligible, or close to eligible, of obtaining subsidized health insurance through an insurance exchange. “If a large percentage of these 127 million people were shifted to the exchange, with a typical annual subsidy around $5,000-$6,000, the annual cost of the legislation would soar and significantly worsen the budget deficit,” he says.

Still, the potential effects of reform are unknown — and a stock pullback may be imminent. However, healthy economic conditions and corporate-profit growth are likely to limit the severity of any pullback, says Kleintop. Instead, “the markets continue to forge a volatile, but upward path during the next several months,” he says.

Who’s Talking: Karl Mills, president and chief investment officer, Jurika Mills & Kiefer

The Gist: To many market watchers’ surprise, the sky did not fall on Monday morning. What to worry about instead of health care? The longer-term problems that are bound to kick up as the U.S. deficit expands.

Like Kleintop, Mills is concerned about the rising U.S. deficit — and about the new health-care legislation as it may trigger further increases. However, he largely downplayed the import of the new law. In the run-up to Sunday’s vote, “there was so much hyperbole that just didn’t make any sense,” he says. If people weren’t upset about death panels, they worried about a government takeover or about winding up speaking Swedish, Mills says, adding: “The government through Medicare and Medicaid is already a big player in health care.”

And even though the government will play an even larger role in the country’s health-care system after this week, private health-care companies will remain in high demand. “We have an aging demographic here, in Europe and in Japan, as well as an increasing need for medicine,” says Mills. “We think the demand story is a much stronger story than the pricing or regulatory story.”

In particular, Mills expects certain health-care companies such as those that supply generic drugs and those that offer greater health-care efficiencies to gain under the new health-care law. Even though gains in the health-care sector were largely already baked into the market before the legislation passed, there’s still plenty of upside potential. “The market usually has these schizophrenic fits where one day everyone is worried about health care and on another about Portugal, but right now, the fundamentals — earnings growth and revenue growth — are good,” Mills says.

From the Brokers: Links to Broker Sites and Research

Ameriprise Financial Barclays Charles Schwab
DWS (Deutsche Bank) Edward Jones Fidelity
J.P. Morgan Merrill Lynch Morgan Stanley
Raymond James T. Rowe Price Wachovia Securities

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