By Caitlin McCabe
Investors are struggling to predict where the stock market is
headed next. Even so, many are already betting that health-care
shares won't lead the way.
The sector offered shelter for investors -- followed by an
outsize rebound -- during the market turbulence earlier this year.
With several companies scrambling to create the first effective
coronavirus vaccine or treatment, health-care stocks suddenly
appeared to offer big opportunities for gains.
Lately, however, much of that allure has worn off. Fund managers
have reduced their allocation to health-care stocks, and investors
recently pulled more money from global health-focused equity funds
than they have in nearly two decades.
The S&P 500's health-care sector finished June as the
second-worst performer of the index's 11 groups, falling 2.5%
compared with the benchmark's 1.8% gain. Companies from
pharmaceutical giant Pfizer Inc. to biotech firm Biogen Inc. to
health insurer Anthem Inc. dragged the sector down, all tumbling at
least 10% during the month to rank among the biggest losers in the
S&P 500.
Investors say the sector's recent losses reflect a growing list
of concerns. Rising coronavirus infections have already halted
elective surgeries in some parts of the country, eating into
revenue as hospitals preserve capacity. Meanwhile, companies
working on virus remedies are facing pressure to keep drug costs
low. Investors are also beginning to fear a Democratic sweep in
November's election that could lead to industry changes --
especially if a more progressive candidate is chosen to run as vice
president.
"Contrary to what many would believe, Covid-19 is not a net
positive for the sector," said David Kastner, senior investment
strategist at Charles Schwab Investment Advisory. "It is simply
less negative than it is for many sectors."
Even with the recent losses, the sector remains down just 0.3%
in 2020, compared with the broad index's 3.1% decline.
This week, investors will look to earnings from the pharmacy
chain Walgreens Boots Alliance Inc. to better understand the
virus's effect on health-care companies. Traders will also be
watching economic indicators such as the Institute for Supply
Management's U.S. nonmanufacturing index for its assessment of the
services industry.
Despite rising rapidly earlier this year, many biotech and
pharmaceutical companies are now trading well below their 2020
highs. Investors initially flocked to companies working on virus
vaccines and treatments, but trial results reveal the long road
ahead. Investors are beginning to realize that many companies will
struggle to find an effective remedy. And those that do will likely
be pressured to keep their medicine affordable, limiting big
opportunities for profit.
As a result, shares of Moderna Inc. and Inovio Pharmaceuticals
Inc. -- both of which are working on a vaccine -- have fallen at
least 26% from their highs this year. Gilead Sciences Inc., the
drugmaker behind Covid-19 treatment remdesivir, is down 9.1% from
its late-April high.
Meanwhile, investors are also trying to assess what a recent
uptick in cases will bring. During the first spike of coronavirus
infections this year, elective surgeries were dropped, doctors
visits were canceled and clinics closed. That weighed on shares of
hospitals operators such as Tenet Healthcare Corp. and HCA
Healthcare Inc., which have badly trailed the broader market this
year, off 52% and 34%, respectively.
The recent underperformance of the sector marks a contrast from
earlier this year. During the selloff that began in mid-February,
the S&P 500's health-care sector fell 28%, compared with the
benchmark index's 34% decline. And then, after markets bottomed in
late March, the group rallied 32% over the next month, outpacing
the broader market. The stocks have, historically, been more
resilient in recessions.
Evidence that traders were beginning to rotate out of the shares
began emerging during the second quarter, when investors, including
stuck-at-home day traders, began piling into cyclical stocks that
careened in the early stages of the pandemic.
By mid-June, the exodus became more clear: Funds that focus on
the health-care and biotechnology sector saw their 10-week inflow
streak come to an end in the week ended June 10, according to EPFR
Global data.
And by the following week, the situation had grown worse: The
funds saw a record $2.6 billion of outflows -- an all-time high
since EPFR began tracking the data in the first quarter of
2002.
Cameron Brandt, director of research at EPFR, said the exodus
from health care is indicative of some profit-taking after a strong
rally, and noted that inflows to the sector have since returned,
though at much smaller levels than this spring. However, he added,
the recent changes have coincided with a political shift, too: As
money began flowing out of health- and biotechnology-focused funds,
more national polls began showing that presumptive Democratic
nominee Joe Biden was overtaking President Trump by a wider
margin.
"Of the sector fund groups that tend to move in response to
political shifts in the U.S., health care and financials tend to be
the most sensitive," Mr. Brandt said.
"Two weeks ago was when the narrative of 'It's still possible
that Trump will get re-elected' [shifted] to 'Trump will not and
may take the Republican Senate down with him,'" he added. "And
Democratic control is not viewed as a positive for the health-care
sector."
Health-care stocks initially rallied in March at the prospect of
Mr. Biden as the Democratic nominee because a massive overhaul of
the health-care system would be less likely under his presidency.
Even so, investors tend to view any kind of Democratic leadership
as less favorable for business.
A June survey from Bank of America of roughly 200 fund managers
showed that they view a Democratic 2020 sweep of the presidency and
Congress as the third-biggest risk that markets are facing,
following a second wave of coronavirus and permanently high
employment.
The survey also revealed that fund managers' net allocation to
the global health-care sector plummeted in June. The bank said a
net 30% of respondents were overweight -- meaning they owned a
larger position than the benchmark they track -- down from 48% in
May.
In the coming weeks, traders say they will be watching to see
whether rising coronavirus infections dent demand for health-care
services and whether employment in the sector will continue to
improve.
The June jobs report revealed that health-care employment
increased by 358,000, led by gains in offices of dentists and
physicians. However, job losses continued in nursing-care
facilities, and employment in the sector remains far below
February's levels.
Many investors and analysts said they aren't worried about any
significant long-term dent in demand. Despite restrictions on
elective surgeries in some states, other facilities have begun
scheduling visits and procedures again. And unlike some sectors
that may suffer from permanent changes in consumer behavior, demand
for health care will persist, analysts and investors predict.
"A lot of the reduced revenue is artificial -- it's just the
local governments that are stopping [health-care providers] from
continuing their services," said Chris Zaccarelli, chief investment
officer for Independent Advisor Alliance. "We believe as those
restrictions are lifted, you'll see a lot of people come
back...Health care will continue to be a good sector to invest
in."
Write to Caitlin McCabe at caitlin.mccabe@wsj.com
(END) Dow Jones Newswires
July 05, 2020 08:14 ET (12:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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