Forget about an apple (or Apple) a day. Healthcare stocks may help keep the investing doctor away.
Shares of Apple have plunged more than 20% this year. The FAANGs of Big Tech and other momentum stocks have been hit hard due to worries about slowing earnings growth and a weakening economy. But many blue chip healthcare stocks have been solid gainers in this bear market for the Nasdaq and S&P 500.
Merck and biotech king Amgen are among the top performers in the Dow. Drug supplier McKesson, cystic fibrosis treatment maker Vertex, Big Pharma leader Eli Lilly and insurer Cigna are all winners in the S&P 500 too. Bristol-Myers Squibb, Lilly and insurer Humana are even near all-time highs.
It’s worth noting that these aren’t the big Covid vaccine stocks either. Pfizer, BioNTech, Moderna and Novavax have all cooled off in 2022 after enjoying huge pops last year. Antiviral drug makers Gilead and Regeneron are in the red this year too.
The strong gains for other healthcare stocks are being driven more by the current economic cycle than the pandemic. Health care stocks often hold up well during tumultuous times. They are perceived to be stable companies that offer products and services people need even during a recession.
And many of the healthcare leaders also pay big dividends and are fairly cheap compared to the rest of the market.
Solita Marcelli, chief investment officer of the Americas at UBS Global Wealth Management, noted in a recent report that healthcare is “trading at an appealing valuation for a late-cycle environment.”
She added that since 2003, global healthcare stocks have tended to outperform the broader market by more than 6% at times when the manufacturing sector is slumping. (The ISM Manufacturing Index reading for May was the second lowest since May 2020.)
Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, added in a report that “as long as economic growth remains in flux,” investors should stick with quality stocks with “a defensive bent.” She specifically cited healthcare, as well as utilities and real estate, two other sectors known for big dividends.
An uptick in mergers could also give the healthcare sector a further boost. Pfizer, Bristol-Myers Squibb and GSK (formerly GlaxoSmithKline) have all announced multi-billion dollar deals this year.
There are risks, of course. Depending on the outcome of the midterm elections, healthcare companies could come under more scrutiny from regulators and politicians. If Republicans win control of the House and Senate, there could be questions about the future of the Affordable Care Act (Obamacare) and what that could mean for drug prices.
But as long as the Federal Reserve is aggressively raising interest rates and investors continue to fret about inflation, healthcare stocks may hold up just fine no matter what happens on Capitol Hill.
“There has been a flight to quality in the stock market,” said Edward Campbell, co-head of the multi-asset team for PGIM Quantitative Solutions. “I’m not surprised to see more classically defensive sectors like healthcare continue to do well.”
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