Health care stocks have traditionally done well during market downturns. But whether they can repeat the feat with continuing uncertainty about the future of health insurance in the United States is a big question.
For one thing, in the declining stock market that began just before the fourth quarter, health care failed to hold its own. Through December, mutual funds and exchange-traded funds in the health care industry fell 14.6 percent, on average, since the market peak on Sept. 20, Morningstar said, compared with a drop of 13.3 percent for the S&P 500. And the iShares U.S. Health Care E.T.F., which tracks the Dow Jones U.S. Health Care Index, lost 10.2 percent.
That’s not a performance for health care stocks that defensive-minded investors can celebrate.
Health care has done well in rough periods for the market in the past, said Jean Hynes, a managing partner at Wellington Management, who runs the portfolio for the $ 48 billion Vanguard Health Care fund. But “it’s not cyclically immune,” she said.
In a way, the sector’s current problems may stem from its multiyear outperformance before the most recent quarter. The sector went on a tear in the five years through September. The S&P 500 health care index returned 13.4 percent on an annualized basis then, beating the full S&P’s 11.6 percent gains, according to S&P Capital IQ.
Why did the sector do so well in that stretch? At the most basic level, the more people use a hospital’s beds and the more drugs they need, the better off a hospital’s or pharmaceutical company’s stock will be.
It’s why HCA Healthcare, one of the largest public hospital groups in the nation, has had such a strong run since the Affordable Care Act was fully put in place in 2014. More people in the United States have health insurance, and that has led to greater use of HCA’s beds.
Over the five years through September, while HCA’s total hospital beds increased 11 percent, revenue rose 36 percent, and the stock rose 259.4 percent. The S&P 500 rose 73.3 percent during the same period, S&P Capital IQ said.
Since the advent of the Affordable Care Act, more people have had insurance, and the amount spent on health care services rose 35 percent from 2010 through 2017. That extra money bolstered health care companies’ balance sheets.
But in the last recession, while health care performed better than the overall market, it didn’t perform particularly well. Part of the reason was uncertainty surrounding the future of health insurance after the 2008 election. Passage of the Affordable Care Act provided some clarity.
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.