The U.S. healthcare stocks have experienced significant volatility in recent weeks as investors turn their attention to the 2020 presidential election and what it could mean for the sector.
Political concerns seem to afflict healthcare stocks every few years. The sector performed poorly in the run-up to the 2016 presidential election as investors worried about an increase in industry regulation. In 2012, healthcare stocks struggled as investors worried that the Affordable Care Act (ACA) would decrease company profits. In both cases, fears proved to be unfounded and market volatility created a buying opportunity for long-term investors.
Recent the volatility stems from two political worries in particular. The first concern relates to ongoing court challenges to the ACA, which actually boosted profitability for many healthcare companies — especially insurers and hospitals — by increasing access to healthcare for many Americans. These same companies could suffer if the ACA narrowed in scope. The second concern among investors is political momentum in favor of expanded universal healthcare coverage. While such a development would likely increase healthcare utilization, it could also disrupt existing insurance companies and place pricing pressure on drug companies and medical equipment and service providers.
As always, our role is not to advocate for a particular policy outcome, but rather to help investors understand how changes in government policy affect their financial situation, and to position portfolios accordingly.
Our first piece of advice is to not overreact to news headlines. Predicting political outcomes is difficult and often backfires, as it did for healthcare sector investors in 2012 and 2016.
Second, any policy-related risks to healthcare sector profits need to be balanced with the opportunities presented by the sector. This includes an increase in demand for healthcare by the aging baby-boom population, revolutions in genomics and healthcare information technology, as well as rising demand for sophisticated medicine in developing countries. Accordingly, healthcare demand is likely to rise regardless of the regulatory framework.
Lastly, the mutual funds we recommend at Hefren-Tillotson have managers who are skilled at analyzing the healthcare sector, and who can buy and sell healthcare companies based on an evolving policy backdrop. For all of these reasons, we recommend that investors take a wait-and-see approach in response to recent healthcare sector volatility.