Strong gains from other health care stocks are being driven more by the current business cycle than the pandemic. Health care stocks often hold up well during turbulent times. They are perceived as stable companies that offer products and services that people need even during a recession.
And many of the leaders in healthcare also pay big dividends and are pretty cheap compared to the rest of the market.
Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, noted in a recent report that health care “is trading at an attractive valuation for a late-cycle environment.”
He added that since 2003, global health care stocks have tended to outperform the broader market by more than 6% at a time when the manufacturing sector is slumping. (May’s ISM manufacturing index reading 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 continues to shift,” investors should stick with quality stocks with “a defensive tilt.” She specifically cited health care, as well as utilities and real estate, two other sectors known for their big dividends.
There are risks, of course. Depending on the outcome of the midterm elections, health care companies could come under increased 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 aggressively raises interest rates and investors remain concerned about inflation, health care stocks may hold up well 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 at PGIM Quantitative Solutions. “I’m not surprised to see more classic defensive sectors like health care continue to do well.”
All eyes on work
Fears of a recession are rising thanks to rate hikes, rising oil and gas prices and concerns that the housing market will finally cool down. But one of the most important parts of the US economy, the job market, remains strong.
Workers are in the proverbial driver’s seat, commanding healthy paychecks, as many companies find it difficult to hire workers amid the Great Retreat. But could even the job market be about to finally get worse?
The government reports June payroll figures on Friday. The data will wrap up a busy week of jobs news, including weekly unemployment figures and payroll processor ADP’s monthly reports on private-sector jobs, as well as the government’s Job Vacancies and Labor Turnover Survey (JOLTS).
The unemployment rate is expected to hold steady at 3.6%, but is likely to start to rise eventually. Based on projections taken at the latest Fed meeting earlier this month, central bankers predict the unemployment rate will end this year at 3.7%, rise to 3.9% next year, and hit 4 .1% in 2024.
That’s still historically low, of course. But there is concern that American workers may not be able to keep up with rampant inflation as wage gains begin to decline. Median hourly earnings increased 5.2% year over year in May, up from 5.5% in April.
Economists, investors and job seekers will be keeping an eye on the June figures to see if there is a further deterioration in wage growth.
Until next time
Monday: US markets closed for Independence Day
Tuesday: US Factory Orders
Wednesday: US ISM Non-Manufacturing Index; US Fed June meeting minutes
Friday: June US jobs report