David Caulfield, October 15, 2016
We are in the midst of the most controversial presidential race yet.
The stock market has been, appropriately so, muted in response to this season’s reality show. Market volatility will continue to rise, though, before the actual election until a clear leader among the candidates emerges.
There is usually a relief rally that follows as the uncertainty of who will win is taken out.
While the stock market historically returns 6% during an election year, it often has a dismal first anniversary return of 2.5% after the election. This is a result of increased uncertainty from a new president’s first year in office, and the perception that campaign rhetoric will remain campaign rhetoric. As recessions and wars are much more common to begin in the first year, the market usually bounces off the first year 2.5% return, to 4.2% and 10.4% in the second and third years.
That being said, in terms of specific sectors and stocks, you may have noticed the short-term event risk on certain industries in the healthcare sector and their stocks. The Democratic Presidential Candidate, Hillary Clinton, has put the “control on sky-rocketed drug cost” on her campaign platform. Following the tweet in September 2015 from Clinton’s campaign referring to the Turing Pharmaceuticals drug price hike, the biotech industry and the expensive “orphan drug” companies like Alexion (NASD: ALXN) have dropped 19% and 14%, respectively.
Since then, the industry and ALXN have fallen another 15%, compared to the S&P 500’s +10%. However, the stock’s recent performance is evidence that any risk pertaining to campaign rhetoric has been more than priced in.
Alexion’s main product, Soliris, along with new drugs like Strensiq and Kanuma, has been recently approved by Japan and Europe. The great news couldn’t come at a better time as future foreign revenue will be immune from US presidential election politics.
Each of the three drugs costs Medicare $400,000, per patient, per year, for life.
That said, the entire sector has mainly benefited from the increasing coverage from the Affordable Care Act (ACA) and generally aging population with longevity, which creates a growing and sustainable demand for medical care. It is estimated that the ACA alone should add an extra $1.8 trillion in healthcare spending by 2025.
By 2020, more than a billion people will be over the age of 60. The ACA coverage expansions are likely to lead to between 15 million and 26 million additional primary care visits annually. The government predicts that between 4,300 and 7,200 additional primary care physicians will be needed each year to meet new demands.
This is why the health sector has returned over 27% for the last 3 years, and a whopping 130% for the last five years. Within the sector, the health care facilities and services industries, i.e., hospitals such as Universal Health Services (UHS), have benefited most because they are less exposed to uninsured patients. Investors interested in these segments of the sector may want to look at ETFs like SPDR Health Care Services (XHS), up 13% since February, and US Healthcare Providers (IHF) up 15%.
This is why when the Republican Presidential Candidate, Donald Trump, put the “repeal Obamacare” on his table, industries which have been significantly benefited from the ACA were seriously under pressure. Amsurg Corp (NASD: AMSG) is the largest operator of ambulatory surgery centers. AMSG dropped 21% over the month following Trump’s acceptance of the Republican nomination. After that, AMSG and others were traded along with daily presidential polls.
Considering the odds that Trump will be elected, and the stock has already priced in that he would, there is little downside risk for AMSG from this point on.
Believe it or not, there are issues that both Trump and Hillary actually agree on.
Both agree to increase the spending on defense and infrastructure.
For the past year, the stock for Lockheed Martin (NYSE: LMT), the nation’s leading defense company, and the IShare Global Infrastructure ETF (NASDQ: IGF) both returned 15%, three times the S&P 500.
The bad news is that the market has already priced in the “good news” to the perfection, leaving only downside risk to investors.
If investing was that easy, you would not be reading my article now.
Disclosure: The Roland George Growth Fund currently has long positions in ALXN and AMSG, but no positions in XHS, IHF, UHS, LMT, and IGF. This is a bipartisan article. Vote Gary Johnson 2016.