The strong gains in other healthcare stocks are being driven by the current economic cycle rather than the pandemic. Healthcare stocks often fare well in turbulent times. They are perceived as stable companies that offer products and services that people need even during a recession.
And many of the top healthcare companies 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 attractive 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% during periods when manufacturing is slumping. (The ISM Manufacturing Index reading for May was the second lowest since May 2020.)
Lauren Goodwin, 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 to quality stocks with “a defensive bias.” She specifically named healthcare, as well as utilities and real estate, two other sectors known for high dividends.
Of course there are risks. Depending on the outcome of the midterm election, healthcare companies could come under closer scrutiny from regulators and politicians. If Republicans gain 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 continue to fret about inflation, healthcare stocks can 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 that more traditionally defensive sectors like healthcare continue to do well.”
All eyes on Jobs
Fears of a recession are growing thanks to interest rate hikes, soaring oil and gas prices and worries that the real estate market is finally cooling off. But one of the most important parts of the US economy – the job market – remains strong.
Workers are literally in the driver’s seat with healthy paychecks as many companies find it difficult to hire workers amid the Great Resignation. But could even the labor market finally deteriorate?
The government is to announce wage and salary figures for June on Friday. The data will cap a busy week of jobs news, including weekly unemployment figures and payroll processor ADP monthly reports on private sector jobs, as well as the government’s Job Vacancy and Labor Turnover Survey (JOLTS).
The unemployment rate is expected to remain steady at 3.6% but is likely to gradually move higher. According to forecasts made at the Fed’s last meeting earlier this month, central bankers predict the unemployment rate will end at 3.7% this year, rise to 3.9% next year and hit 4.1% in 2024 .
Of course, that’s still historically low. But there are concerns that American workers will not be able to keep up with runaway inflation as wage increases slow. Average hourly earnings rose 5.2% year-on-year in May, compared to 5.5% in April.
Economists, investors and job seekers will be watching the June numbers closely to see if there is any further deterioration in wage growth.
Monday: US markets closed on Independence Day
Tuesday: US factory orders
Wednesday: US ISM Non-Manufacturing Index; Minutes of the US Federal Reserve from the June meeting
Friday: US jobs report for June