I wrote in a column last October about the prospect for the performance of the stocks of companies in the insurance industry as the Patient Protection and Affordable Care Act (PPACA) began to be implemented.
The defensive part of the strategy was and is based on the idea that compulsory reallocation of consumer-disposable income to low-multiplier-insurance purchases comes at the expense of every other sector of the economy. But the consumer retail sectors that cater to discretionary income are affected most importantly.
As discretionary income decreases due to an increase in insurance consumption, retail sales fall and retail stocks along with them. This trend has been reflected mostly as positive for the insurance stocks and negative for the retail sales and retail stocks, as I last discussed a few weeks ago in the column, Health Care Expenses Complicate GDP.
The four insurance companies I discussed in the insurance column in October were chosen for their size and distinct insurance sector focus.
MetLife (MET) was chosen because of its concentration in life insurance, Aetna (AET) as representative of the health insurance sector, Progressive (PGR) for its concentration in property and casualty insurance and Allstate (ALL) for its participation in both life and health, (L&H) and property and casualty (P&C).
The expectation for the performance of the insurance stocks is a subset of the idea that an increase in insurance consumption comes at the expense of other sectors. That subset is that compulsory increases in health care consumption should also come at the expense of voluntary insurance, the largest component of which is life insurance.
And that is what has occurred.
Aetna has been the best performer of the group, with a stock price that has increased by 50% since October 28. MetLife, Allstate and Progressive are only up 4%, 4%, and 3%, respectively.
The dichotomy in this performance is supported anecdotally by the idea that the implementation of the affordable care act is indeed causing a reallocation of personal consumption expenditures. And that is providing a drag on economic activity and future potential.
This observation is further supported by the performance of the rest of the healthcare insurance sector with Cigna Corp. (CI), Anthem, Inc. (ANTM), and UnitedHealth Group Incorporated (UNH) up 50%, 25%, and 26% respectively since last October 28.
On the other side, the relative underperformance of the rest of the insurance sector is also supportive of this idea. Life insurance company Prudential (PRU), is only up 1% since October 28, and P&C-focused American International Group (AIG) up 13%.
All of this action is supportive of the overall trajectory thesis for economic activity. That holds that retail sales cannot increase due to this forced reallocation of income into low- multiplier-insurance consumption. And that is acting as a drag on economic activity and potential.
Economic rebounds and cyclical growth starts traditionally with an increase in high multiplier consumer spending, the most important of which is housing. The forced reallocation of spending is also helping to cause potential first-time home buyers to indefinitely postpone purchases.
But there is also another component of this, which I'm writing about for Wednesday's column. That is that younger consumers, the 18-to-34 year-olds, appear to be collectively choosing a lifestyle that places the consumption of experiences above that of things. This pattern is going to have a profound impact on the potential performance of stocks in the retail space.
As for the insurance issue, though, the recent pattern of outperformance by the health care stocks vs. the rest of the industry, as well as the retail stocks broadly, is likely to continue. That will occur unless something causes retail sales, job creation and incomes to begin rising faster than has been the case over the past five years.
