Health sector stocks dead last after first-quarter wraps up; But some say outlook rosy due to strong fundamentals, unlikely changes to Obamacare.

“It’s all in how you look at it,” I was taught as a child by my immigrant grandparents. What does this have to do with evaluating the healthcare sector’s first-quarter performance on Wall Street, and what does its performance portend for the rest of 2019? Please read on.

Schwab currently has an Outperform rating on the sector citing the following basic indicators. In general, healthcare companies’ balance sheets are solid, their stocks have offered attractive dividend yields and the sector’s overall cost structure appears to have improved. Demand appears to be on the rise for healthcare products and services. On the other hand, political and legal rhetoric around the Affordable Care Act and perceived high costs can be expected to fuel continued volatility.

But the perception of healthcare equities as the best defensive play going into a distinct period of uncertainty about the overall strength of the future US and global economy wasn’t born out in the first quarter. Not even close.

Instead, leading the way higher for US stocks this quarter was the tech sector, which skyrocketed nearly 20% in the period. Tech giants Apple and Microsoft–two of the biggest publicly traded US companies–rose more than 16% each for the quarter, but the sector’s best performer is an unlikely stock: Xerox. Shares of the copy and fax machine maker are up more than 60% to start off the year. They are also among the best-performing stocks in the entire S&P 500.

Other top-performing sectors include real estate, energy and industrials. Real estate got a boost from lower interest rates, while higher oil prices boosted energy. Meanwhile, optimism around US-China trade negotiations lifted industrials.

Not every sector performed as well, however. In fact, contrary to many investors’ belief, health care and financials were the biggest stragglers among S&P 500 sectors, rising around 6% and 8%, respectively.

Chart compliments of CNBC and FactSet

Market outlook for the healthcare sector

The healthcare sector continues to be in the headlines, with announced Democratic 2020 presidential candidates often promising to rein-in healthcare costs. However, just last week President Trump had seemed to go all in with a new effort to eradicate Obamacare. Then Trump reversed course and signaled Monday that congressional Republicans would wait until after the 2020 elections to vote on a GOP replacement for Obamacare–putting off a presumably vicious legislative battle on a white-hot campaign issue until after his re-election bid.

Healthcare investors should always be prepared for volatility, given the influence the political arena can have on the healthcare world. However, the majority of observers continue to believe the healthcare sector will benefit from good growth characteristics combined with the traditionally defensive nature of the sector, resulting in a positive outlook for stocks.

Bottom Line:

Factors that may affect the healthcare sector

Positive factors for the healthcare sector include:

  • Increased need for services: An aging population requires more extensive drug treatments and medical care. The health issues associated with obesity also could boost demand for medical services.
  • Strong financials: Balance sheets in the healthcare sector remain flush with cash, increasing the possibility of higher dividend payments, share-enhancing stock buybacks and mergers and acquisitions.

Negative factors for the healthcare sector include:

  • Regulatory uncertainty: Entering a political campaign season that includes a presidential election where health care is likely to be the center of many political campaigns, volatility is likely to increase at times.
  • Fiscal policy concerns: The current fiscal situation in Washington creates uncertainty regarding the healthcare sector. Certain funding mechanisms could be changed as Congress deals with growing deficits.

First-Quarter Health-Sector Winners

 BPTH Bio-Path Holdings     +434.72%     19.31
 AXSM Axsome Thera     +404.15%     13.29
 MBOT Microbot Medical     +337.43%      7.93
 PHAS Phasebio Pharma     +238.87%     10.58
 ATOS Atossa Genetics     +209.91%      3.40
 ONCE Spark Therap     +197.71%    112.93
 CNST Constellation Pharma     +186.29%     13.11
 CRIS Curis Inc     +182.05%      2.16
 MGTA Magenta Therapeutics     +171.70%     15.50
 OCX Oncocyte Corp     +167.74%      4.12
 VYGR Voyager Therapeutics     +147.69%     21.68
 CPRX Catalyst Pharm Inc     +144.24%      5.26
 PLXP Plx Pharma Inc     +131.30%      5.32
 BIOL Biolase Inc     +130.92%      2.39
 NVUS Novus Therapeutics     +126.32%      4.30
 CMTA Clementia Pharma     +123.28%     26.01
 RKDA Arcadia Bio     +122.70%      7.25
 EPZM Epizyme Inc     +119.23%     13.01

Data furnished via Barchart

First-Quarter Health-Sector Losers

 APTX Aptinyx Inc     -75.13%     4.40
 SLDB Solid Biosciences Inc     -66.33%     9.41
 DPLO Diplomat Pharmacy Inc     -58.31%     5.54
 SEEL Seelos Therapeutics Inc     -55.30%     3.07
 RMED Ra Medical Systems Inc     -54.71%     3.85
 ADIL Adial Pharmaceuticals     -51.85%     3.24
 OSMT Osmotica Pharmaceuticals     -50.70%     3.86
 LQDA Liquidia Technologies Inc     -50.60%    10.34
 ACIU AC Immune SA     -48.89%     4.77
 ARA American Renal Associates     -47.07%     6.08
 CSU Capital Senior Living     -43.46%     3.92
 PETX Aratana Theraptcs     -41.91%     3.57
 XERS Xeris Pharmaceuticals Inc     -41.83%     9.84
 IMGN Immunogen Inc     -41.68%     2.73
 ZFGN Zafgen Inc     -41.62%     2.88

Data furnished via Barchart

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