The S&P 500, tracked by the C Fund, continues to flirt with all-time highs of 2,940 that it previously set in September 2018:
In fact, the S&P 500 is close enough to all-time highs that the C Fund already reached all-time highs about a week ago due to reinvested dividends.
However, the healthcare sector is acting as an anchor on the index in recent months. Specifically, the healthcare portion of the S&P 500, which consists of 62 companies out of the 500 in the index, has underperformed the broader index by about 14% over the past three months:
Over the past ten years, the healthcare sector has mildly outperformed the broader S&P 500. However, an increased push by some 2020 Democratic presidential candidates for single-payer healthcare has put pressure on healthcare stocks in recent months.
The most vulnerable companies under a single-payer scenario would be the health insurance companies, because that’s the portion of the system that single-payer healthcare would largely replace if it were implemented. Other healthcare companies, like pharmaceutical companies and medical device manufacturers, would likely not be directly affected but may face increasing pressure to lower prices, which could reduce their profit margins and stock valuations.
High Costs and Low Results
According to Gallup, about 70% of polled Americans have maintained a negative view towards the U.S. healthcare system over the past 25 years, and this figure has remained consistent through multiple administrations and reforms.
The numbers make it easy to see why. The United States has by far the most expensive healthcare system in the world on a per-capita basis or as a percentage of GDP:
Healthcare Spending as % of GDP, 2017
Despite the high spending, the United States is ranked #43 by the CIA World Factbook for life expectancy, behind most other developed countries. Additionally, the United States is ranked #56 at minimizing infant mortality, tied with Serbia.
So there is a lot of room for improvement in terms of both cost reduction and enhanced outcomes, but the best approach to improve the U.S. healthcare system is a hotly debated and polarizing topic. And when politics have a large impact on the long-term financial prospects for a whole sector, it is hard to predict the performance of that sector or determine appropriate valuations for the companies involved.
Unclear Future
Many analysts are saying that the healthcare sector is now oversold, suggesting that the sector is a good buying opportunity and could rebound, which could help the S&P 500 reach new highs.
The outcome of the next election is uncertain. If the Republican party maintains the presidency, the healthcare sector is unlikely to face the prospects of a single-payer system. If the Democratic party wins the presidency, it would still be over 20 months until they take office, followed by months or years of negotiations within Congress to pass legislation, which could still be blocked. Additionally, only a portion of current Democratic candidates support a single-payer system. So, it’s far from clear how the U.S. healthcare system might or might not change in the coming years.
The best approach that most investors can do is maintain a highly-diversified portfolio including U.S. stocks, foreign stocks, bonds, real estate, and more – so that as various parts of the economy ebb and flow, you can regularly rebalance and continue to build wealth and financial security.
Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.