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Why Health Care Stocks Have Taken a Speculative Turn

Health Care Stocks: Are They More Speculative?

Many investors see the U.S. health care sector as a potential defensive play during turbulent markets. The idea is partly that much demand for medical care is recession-proof—people still visit the doctor’s office even when the economy is struggling. There’s also a demographic argument: demand for health care from the country’s large and aging Baby Boomer population has been viewed as good for the health care business and, by extension, health care stocks.

But the health care sector may no longer be as “defensive” as it was in the past, says Brad Sorensen, Director of Market and Sector Analysis at the Schwab Center for Financial Research. He sees two factors at work here: volatility arising from the biotech industry, and an uncertain regulatory environment.

Many investors are intrigued by the potential for new medical treatments emerging from biotech businesses. That these hoped-for breakthroughs don’t always pan out has led to volatility in biotech stocks—they led the market correction in August 2015 after being driven up by investors in the preceding months. “There are a lot of exciting things going on in biotech, but the reality is that many of the treatments are still in their infancy and have yet to demonstrate their efficacy or secure federal approval,” Brad says.

Meanwhile, the implementation of the Affordable Care Act continues to generate uncertainty. “Some investors believed the mandatory nature of the law would help certain areas of the health care sector perform better,” Brad says. Indeed, early signs seemed to indicate hospital earnings would benefit as more people gained insurance. But enrollment in state exchanges has since fallen well short of expectations,1 causing some health care providers to dial back their earnings expectations.

In addition, high-profile drug-price increases are bringing heightened political and public scrutiny to pharmaceutical companies. Brad believes the government is likely to get more involved in the sector in the months and years to come. “The government’s goal is to make health care more affordable for Americans, not more profitable for health care companies,” he says.

According to Brad, these developments suggest health care stocks could be more volatile than they have been in the past.

“Investors looking for defensive opportunities might consider information technology (IT) or financials,” Brad says. “IT demand is proving more resilient than in the past, and both bank and consumer balance sheets appear healthy.”

1Brian Blase, “Downgrading the Affordable Care Act: Unattractive Health Insurance and Lower Enrollment,” Mercatus Center at George Mason University, 11/19/2015.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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