We like health-care stocks in 2024 despite presidential election year weakness
As the old Wall Street adage goes, health care tends to underperform the stock market in presidential election years — and in recent cycles, that’s been true. But, there’s reason to believe this year that many health-related stocks, led by Eli Lilly , could defy historical convention. The S & P 500 Health Care Sector index has outperformed the broader S & P 500 in just three of the past eight presidential election years dating back to 1992, according to FactSet data. That’s equal to just 38% of the time. By contrast, when considering all years since 1992, health care has outshined the S & P 500 more than half of the time — 18 out of 32. So far in 2024, health care has been the best-performing sector in the S & P 500, climbing roughly 2%. The overall broad market index has dropped around 1% year to date. .GSPHC .SPX YTD mountain Health care sector vs. S & P 500 YTD It’s way too early for any grand predictions with Election Day 2024 about 10 months away. Nevertheless, we see attractive fundamentals in the year ahead for a host of health-care stocks, giving us the confidence to own Lilly, GE Healthcare and Danaher despite what history says about the group in presidential election years. Last week , we added Abbott Laboratories , Amgen , Novartis , and Walgreens Boots Alliance to our stock watchlist, known as the Bullpen. Jim Cramer interviewed the CEOs of all four companies at last week’s JPMorgan Healthcare Conference in San Francisco. “Health care may be a real challenger to tech this year, a business that can actually grow faster than most of tech and has the possibility of a comeback from the Covid straitjacket that so many of these companies got caught up in,” Jim wrote in his weekly column on Monday . In general, the reason investors tend to be more cautious about the health-care sector in presidential election years is tied to rhetoric and policy uncertainty. Of course, the specifics of each election may differ. However, the cost of prescription drugs and health insurance in the U.S. tends to be a point of discussion for politicians, which can make some investors wary about committing money to stocks in an industry under critical rhetorical fire. Consider that Sen. Bernie Sanders of Vermont, a leading candidate for the 2020 Democratic presidential nomination, had a “Medicare for All” proposal at the center of his campaign. While Joe Biden eventually overtook Sanders as the Democratic nominee (and ultimately became president), Sanders’ early strength in polls had ripple effects on health insurance stocks on Wall Street . .GSPHC .SPX mountain 2022-12-30 Health care sector vs. S & P 500 since 2023 Last year, the health-care sector lagged the S & P 500 by a wide margin — up 0.3% compared with a 24.2% advance for the overall index. After a strong 2022 for health care in a terrible overall market, investors last year placed a lower emphasis on the defensive characteristics of health care. Without the 59% gain from Eli Lilly, which is now the most valuable health-care company in the S & P 500, the sector’s performance in 2023 would’ve been even worse. The recent disparity has created a situation where valuations look pretty attractive across most industries within health care, including many pharmaceutical and medical device companies, according to Damien Conover, director of health-care research at Morningstar. “We think it’s a great time to take advantage of it,” he argued in an interview. It’s difficult to predict whether the U.S. economy is going to “keep growing really well, or maybe dip down, but either way health care I think is well-positioned on a valuation standpoint,” Conover said. “In a lot of cases, especially big biopharma and some device companies, you get a nice [dividend] yield, as well.” In recent election cycles, drug companies have been a prominent target for politicians. However, Conover suggested that rhetoric around the group may take on a different tone in 2024 due to provisions in the Inflation Reduction Act, or IRA. The August 2022 law — championed by Biden and other Democrats — gave the agency that runs Medicare the ability to negotiate drug prices with manufacturers and implemented a yearly out-of-pocket cap on prescription drug costs for those enrolled in the government health program for seniors. Politicians may continue to criticize drug companies, Conover cautioned, but the magnitude this cycle may be reduced with the IRA on the books. “With valuations as low as they are, usually when we see low valuations and high rhetoric, it usually doesn’t do much,” he added. “Even if the rhetoric is higher than what I’m anticipating, I think that is partially a stabilizer.” LLY 1Y mountain Shares of Eli Lilly over the past 12 months. Eli Lilly remains the Club’s favorite…
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