From the May 2008 issue of Investment Advisor • Subscribe!

May 1, 2008

A Healthy Portfolio?

Healthcare has traditionally been thought of as a defensive sector, since even when economic conditions get bad, people will still take care of their health.

However, healthcare companies have not performed well this year at all, even as other traditionally defensive sectors like consumer staples have held up.

"The healthcare sector's traditionally defensive characteristics are being undermined by eroding fundamentals," says Sam Stovall, chief investment strategist for Standard & Poor's. "We see sparse drug pipelines and ongoing patent expirations weighing on the profit outlooks of the pharmaceutical companies, while deteriorating pricing power and growing margin pressure is squeezing profits in the managed care and medical device industries. In addition, we think the upcoming presidential and congressional elections are likely to increase regulatory uncertainty, further clouding the sector's fundamental outlook. Lastly, we believe the sector's technical outlook is increasingly negative."

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