Close Close

Life Health > Long-Term Care Planning

When Markets Don’t Behave as Expected

Your article was successfully shared with the contacts you provided.

Since the Federal Reserve raised interest rates in mid-March, for the second time in three months, U.S. bond yields have declined, and despite expectations (until last Friday) for repeal of the Affordable Care Act, the S&P Large Cap Health Care sector has been the second best performing group in the S&P 500 year to date.

(Related on ThinkAdvisor: Fed Raises Rates; So What Should Clients Do?)

Both developments fly in the face of the conventional wisdom of the market, contradicting what the fundamental factors would seem to suggest, but if you dig a little deeper, those results are not so surprising.

Why Bond Yields Fell After Fed Hiked

“Rates will not move that much higher because the technicals are profound; the bids from pension funds and other institutional investors are extraordinary,” said Rick Rieder, chief investment officer, global fixed income at BlackRock, at a recent breakfast meeting with reporters. “There is not enough supply relative to demand.”

Rieder explained that in addition to U.S. institutional investors, investors across the globe — many from countries with lower and even negative interest rates — continue to purchase U.S. bonds.

As of the close on Friday, the 10-year Treasury was yielding 2.41%, down from 2.60% at the close on March 14, the night before the Fed raised rates. Even the yields on 3-, 6- and 12-month bills had fallen slightly from their closing level on March 14.

Why Health Care Is the Second Best Performing Sector YTD

Nick Colas, chief market strategist at Convergex, a global brokerage firm, wrote that there are several reasons health care stocks have been outperforming:

  • They’re cheap. The average forward price-to-earnings ratio of the top five names in the sector, which gained an average 7.9% year to date through Thursday, is 14.5 times, compared with S&P 500’s forward P/E of 17.8 times.                                                                                                                                         
  • Many stocks in the sector were expected to perform better if Obamacare were repealed and replaced by the American Health Care Act, including pharmaceutical stocks, which comprise 41% of the sector; biotech stocks, which account for 21% of the sector and medical equipment stocks, with a 16% weighting. In addition, under an Obamacare repeal medical equipment stocks were expected to benefit from the elimination of the medical device tax while biotech companies were expected to benefit from less regulation, allowing companies to bring products to market faster.
  • Health care services stocks, which account for 19% of the index, comprised the only major subsector (S&P calls it a “sub-industry”) that was expected to suffer under the Obamacare replacements, also known as Trumpcare or Ryancare.

What’s Next for the Stock Market

What happens now to health care stocks and the broader stock market will depend in large part on what happens to the Trump and the Republican agenda.

Expectations for health care reform followed by tax reform had been driving the Dow Jones industrial average to record-breaking highs, first above 20,000 and then briefly above 21,000. But now prospects for tax reform are not as bright as they had once seemed.

(Related on ThinkAdvisorWhy the Market’s Great Expectations for Trump Are Overdone)

Even House Speaker Paul Ryan, R-Wis., conceded as much after he pulled the Republican health care bill from a vote on Friday because he didn’t have enough votes lined up to pass it. “This does make tax reform more difficult,” Ryan said. “But it does not in any way make it impossible.”

(Related onThinkAdvisorRyan Pulls Bill to Repeal Obamacare; Says Tax Reform Now in Danger)

Passage of the bill to repeal and replace Obamacare was expected to generate savings that could help finance tax cuts as well as momentum to pass a tax reform bill.

The stock market reacted to Friday’s failure of the health care bill. The Dow capped seven straight losing sessions, closing at its lowest level since mid-February. It was the biggest weekly drop since the week ended Nov. 4, just days before the presidential election.

“The current rally is very much a faith-based move,” wrote Colas on Wednesday. “At some point the sizzle becomes less important than seeing the steak. And if you don’t have all the right ingredients in place, it may not be much of a meal.”

Not yet anyway.

—Related on ThinkAdvisor:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.