There's a famous bar near New York's Times Square, Jimmy's Corner, that has a large sign among its amazing collection of boxing memorabilia--"Let's Not Discuss Politics Here." I try to take those words to heart as often as possible, but every once in a while even market commentators have to look towards Washington, DC for guidance.
That has been evident in this week's trading in healthcare stocks. The Healthcare Select SPDR (XLV) has plummeted this week, trading today at $85.68 after reaching a level of $92 per share as recently as April 5th. The plunge in healthcare stocks can be attributed to three words uttered by UnitedHealth Group (UNH) CEO David Wichmann on his company's earnings conference call Tuesday: "Medicare For All." UNH shares had been bid up in Tuesday morning trade on the back of earnings and revenues that exceeded analyst estimates. The stock reversed abruptly - and took the rest of the market down with it - though, after Wichmann uttered those three fateful words on his call.
As of today's trading XLV shares are down slightly - 0.9% - for 2019, a huge lag of the S&P 500's 15.9% gain. Any thought of a government takeover of the U.S healthcare system is enough to spook investors, and as crazy and wrongheaded as such a move would be, it has been proposed by several announced candidates for the presidency on the Democratic side.
So, politics are an externality that the market would rather ignore. On days such as today, however, with the release of the full version of the Mueller report, politics once again take center stage. I can assure you that your average Wall Streeter - and I was one for many years - knows far less about politics than he or she thinks. But those feelings occasionally translate into animal spirits that can lead to both the buying and selling of stocks.
So, if you own XLV, you should reconsider that stance. The index is heavily weighted toward Johnson & Johnson (JNJ) (10%) with Pfizer (PFE) and Merck (MRK) combining for another 13% of the index, but the number two component is the suddenly volatile and controversial UNH. The market is reminding us that healthcare is far from a stable, steady - some might say "boring" - sector in which to invest,.
Healthcare stocks provided market leadership - in a bullish direction - for the U.S. stock market in 2018, but I would be very wary of the type of leadership those names could provide in 2020. If you own JNJ, MRK or the other healthcare majors, it would be unwise to forego that stream of dividends - and consistent dividend increases - over fears of far-off events, but those positions are worth a rethink.
On a day when Zoom Video Communications (ZM) shares are zooming more than 60% above their IPO price, this market is showing signs of "toppiness." Just remember that there are no such things as defensive stocks in a market pullback. December's market action reminded investors of that truism yet again. So be careful with healthcare stocks here, or at least as careful as the average healthcare CEO is when discussing political issues with analysts and reporters.