Challenges Facing Health Care Stocks in 2019

Health care stocks, traditionally viewed as safe havens during periods of broader market volatility, have pulled back sharply after being the strongest performer in the S&P 500 index in 2018. The sector has been dragged into the broader market's steep sell-offs due to a myriad of concerns, including: slowing corporate earnings, trade tensions and rising interest rates. Market watchers flag big risks ahead for the industry in 2019, including: regulatory uncertainty, particularly regarding the politically charged Affordable Care Act; technical indicators signaling a sector bottom; and, fiscal policy concerns.

4 Health Care Stocks In 2018

• Tenet Healthcare, YTD Performance: 27%
• Molina Healthcare, YTD Performance: 53%
• Allergan PLC, YTD Performance: 16.5%
• Horizon Pharma PLC, YTD Performance: 26.2%

^{Performance as of market close 12/19}

The Health Care Select Sector SPDR Fund (XLV) exchange-traded fund is the oldest and largest fund in the segment. It's fallen by double-digit figures since the start of December, weighed down by news last week that a federal judge ruled the Affordable Care Act, or Obamacare, to be unconstitutional, per the Wall Street Journal.

Stocks such as hospital operator Tenet Healthcare Corp. (THC) and Molina Healthcare Inc. (MOH) have plunged dramatically lower than the health care sector. The group pulled back again on Thursday.

While the ruling has taken health care on a wild ride, investors may be overreacting to the potential risk. This isn’t the first time that Obamacare has been challenged amid the increasingly polarized political landscape in the U.S. The ACA has been great for health care providers as it created millions of new customers by expanding access to health insurance. Any replacement policy framework would likely reduce access to health insurance, eating into revenue for providers.

In a recent sector roundup by Charles Schwab, the firm cited negative factors for the health care sector including fiscal policy concerns.

“The current fiscal situation in Washington creates uncertainty regarding the health care sector. Certain funding mechanisms could be changed as Congress deals with growing deficits,” read the report.

Health care is the only S&P 500 sector that has generated double-digit returns for shareholders in 2018, as indicated, which could spell bad news for investors, according to data from DataTrek Research, per Business Insider.

“The upshot here is that health care may look like a safe harbor in the current storm, but its current weighting shows it is very likely at a relative top versus other S&P 500 sectors," wrote Nicholas Colas, co-founder of DataTrek.

Health care’s outperformance has driven its S&P 500 weighting to 15.6%, a size only reached six other times since 1979, wherein each time the group began underperforming relative to other sectors.

There may be more than a silver lining to this trend. When health care was similarly weighted, the broader market began to outperform, signaling good news for investors who have suffered from a painful 16% loss for the S&P 500 from its 52-week high as of Thursday's close. 

Negative headwinds aside, some market watchers say now is an opportunity for value investors to buy health care stocks on the dip. Charles Schwab cites health care companies’ strong balance sheets, attractive dividend yields and improved cost structures. Meanwhile, booming demand could accelerate top line growth. Demand is expected to increase for health care products and services, fueled by such trends as an aging U.S. population, increased prevalence of lifestyle-related diseases, demand for new drugs, and expanding insurance coverage.

Schwab added that large-scale changes regarding Obamacare remain unlikely in the near term given the split Congress and politics in Washington. Volatility could therefore provide an opportunity for value investors.