Health Care May Not Cure What Ails Portfolios This Time

Health Care May Not Cure What Ails Portfolios This Time

Uncertainty has returned. While Republicans in Congress failed to overturn the Affordable Care Act after the 2016 election, the Trump administration has tried to weaken it, and a federal judge in Texas ruled in December that the entire act was unconstitutional. That ruling has no effect while it is under appeal, but it doesn’t help the industry, because a final decision could take years, and it might go all the way to the Supreme Court. “This adds uncertainty,” Ms. Hynes said.

These issues, as well as the sector’s outperformance in recent years, may make health care less of a solid performer in tough times now, but it certainly has an outstanding record.

“You’re going to a doctor and buying medicine, whether it’s good or bad economically,” says Scott Wren, senior global equity strategist for Wells Fargo Investment Institute.

The data shows that the industry has performed well during market struggles. According to Bank of America Merrill Lynch research, through the last six bear markets since 1973 — defined as a 20 percent or more decline from the market’s peak — when the S&P 500 experienced an average loss of 39 percent, the health care industry outperformed the S&P by 11 percent annualized.

It lagged only consumer staples, energy and utilities stocks. And, according to CFRA Research, since 1946, health care has outperformed the overall market 75 percent of the time during similar downturns.

During times of economic uncertainty, consumers tend to cut back on the things they don’t need. While enthusiasm for restaurant dining or a new smartphone may wane, the need for medical care continues.

The rise in health care stocks in recent years has left the industry more expensive than the overall market, with a price-to-earnings ratio of 20 for health care stocks in the S&P 500 compared with only 17.7 for the entire index, according to Bloomberg.

“It has been a good place to hide,” says Lindsey Bell, an investment strategist at CFRA Research. If a recession were to hit, it wouldn’t mean health care would be immune; it’s “not bulletproof,” Ms. Bell said.

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