Healthcare stocks, along with the stocks of food and drink companies are often recommended as defensive holdings for recessions and bear markets, on the premise that no matter what happens people will always have to eat, drink, and take their medicine.
The other side of that thought is that sectors seen as defensive may not be the best holdings in a bull market, when techs, industrials, and speculative stocks of the latest new fad (dotcoms, social networking?) are hot and leading the way.
That may be true for some individual food and drink company stocks. Campbell Soup, Coca Cola, Conagra Foods, Hershey Foods, Kellogg, McDonald’s, Yum Brands, still below their levels of mid-2013, come to mind.
However, the healthcare sector has been much more than a ‘defensive’ holding. It has handily outperformed the S&P 500. That can be seen in the performance of the SPDR Healthcare etf, symbol XLV.
XLV is a ‘passive’ (unmanaged) index fund, with a low annual net expense ratio of only 0.16%. Its ten largest holdings are Johnson & Johnson, Pfizer, Merck, Gilead Sciences, Amgen, Abbvie, Bristol Myers Squibb, UnitedHealth Group, Biogen, and Celgene.
Prior to the passage of the Affordable Care Act (Obamacare), predictions were at both extremes regarding the effect its passage would have on the healthcare sector.
It would be a big negative. It requires pharmaceutical companies to provide higher rebates to Medicare for prescription drugs (estimated at an additional cost to them of $20 billion over ten years), new excise taxes on branded drugs (estimated at $5.3 billion over two years), and a 2.3% tax on the sale of all medical devices (ranging from MRI’s and implants to research equipment).
No, it would be a big positive. More people having health insurance would result in those who previously waited until they were seriously ill and then went to hospital emergency rooms, would be under a doctor’s preventive care, and taking prescription drugs.
However, the healthcare sector had become an innovative and significant growth industry long before the Affordable Care Act became an issue. It was as advanced in pioneering state-of-the art breakthroughs in prescription drugs, vaccines, and medical equipment, as is any other tech-based industry. That did not change under Obamacare.
Nevertheless, with more than 11 million previously uninsured people now insured under the Act, expected to reach 20 million by the end of 2015, it does look like the Affordable Care Act was more of a positive than a negative for the industry.
Therefore, there are concerns now being expressed in some quarters that with the Republican party taking control of both the House and Senate, significant changes are coming for Obamacare.
That may be.
However, it is doubtful that even if able to do so, Congress would make significant changes that take healthcare coverage away from 10 to 20 million previously not covered, now covered, voters – er – people.
Any near-term changes would more likely involve lessening the burden on corporations, including the negatives for the pharma companies, the new taxes that were imposed on them, the additional rebates to Medicare, etc., while not depriving them of the increased demand for pharmaceuticals and medical procedures from a greater portion of the population having insurance coverage.
While the healthcare sector may pull back short-term on the political concerns, such a pullback is likely to be another buying opportunity for a sector that has so consistently out-performed the S&P 500, and has the added attraction of being considered a defensive sector in the event of a market downturn. (The XLV etf declined 40% in the 2007-2009 melt-down while the S&P 500 declined 57%).
In the interest of full disclosure, my subscribers and I have a position in the healthcare sector via the SPDR Healthcare etf, XLV.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost.
Images: Flickr (licence attribution)
Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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