The strong gains for other healthcare stocks are being driven more by the current economic cycle than the pandemic. Health care stocks often hold up well during tumultuous times. They are perceived to be stable companies that offer products and services people need even during a recession.
And many of the healthcare leaders 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 appealing 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% at times when the manufacturing sector is slumping. (The ISM Manufacturing Index reading for May 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 remains in flux,” investors should stick with quality stocks with “a defensive bent.” She specifically cited healthcare, as well as utilities and real estate, two other sectors known for big dividends.
There are risks, of course. Depending on the outcome of the midterm elections, healthcare companies could come under more 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 is aggressively raising interest rates and investors continue to fret about inflation, healthcare stocks may hold up just fine 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 for PGIM Quantitative Solutions. “I’m not surprised to see more classically defensive sectors like healthcare continue to do well.”
All eyes on jobs
Recession fears are growing thanks to rate hikes, surging oil and gas prices and concerns that the housing market will finally cool. But one of the most important parts of the US economy — the labor market — remains strong.
Workers are in the proverbial driver’s seat, commanding healthy paychecks as many businesses find it difficult to hire workers in the midst of the Great Resignation. But could even the job market be poised to finally take a turn for the worse?
The government reports the June payroll figures Friday. The data will wrap up a busy week of jobs news, including weekly unemployment numbers and monthly reports from payroll processor ADP about private sector jobs as well as the government’s job openings and labor turnover (JOLTS) survey.
The unemployment rate is expected to hold steady at 3.6%, but it is likely to eventually start creeping higher. According to projections taken at the Fed’s latest meeting earlier this month, members of the central bank are predicting that 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 are concerns that American workers won’t be able to keep up with rampant inflation as wage gains start to slow. Average hourly earnings rose 5.2% year-over-year in May, down from a 5.5% rate in April.
Economists, investors and job seekers will be keeping a close eye on the figures for June to see if there is a further deterioration in wage growth.
Monday: US markets closed for Independence Day
Tuesday: US factory orders
Wednesday: US ISM non-manufacturing index; US Fed minutes from June meeting
Friday: US jobs report for June