These catalysts, MacDonald explains, have been progressive for the sector. They began with Berkshire Hathaway’s purchase of around five million shares in UnitedHealth, a company that had been struggling for a while. Policy calls in the US to reshore manufacturing saw Pfizer announce $70 billion in US-based research and manufacturing investment, adding a tailwind to the stock. Then, as Q3 earnings reports started coming out, investors were unable to ignore the successive earnings beats and forward guidance raises from big names in the health care sector.
Wider equity market dynamics have also played a role. MacDonald explains that because mega-cap growth technology has been such a dominant performer this year many investors are now looking to take some profits and move them into more defensive sectors. As markets have corrected somewhat and tech has pulled back slightly, MacDonald notes that investors have shifted towards health care, a sector that is both traditionally defensive and showing strong earnings growth at the right time.
Despite all that reason for positivity, MacDonald says he’s not ready to call this a health care bull market just yet, because policy risk still hangs over the sector. Health care has long carried something of a political risk association, as various governments might put the sector in its crosshairs. Some of the reason for health care’s underperformance in Q2 and Q3, MacDonald notes, was the overhang of a Secretary of Health and Human Services with anti-vaccine leanings and the overall issues that come with a somewhat arbitrary US administration.
Policy overhangs, however, are not a new dynamic for health care investors. MacDonald notes that while some of the noise out of Washington can cause upticks in implied volatility, it is more often being discounted as just noise. Other complicating stories like risks to Fed independence appear to have subsided and while a new political focus on affordability in the United States may introduce new risks for US healthcare companies, there could be a shift in cost-bearing away from US markets and towards the rest of the world to compensate.
Because policy remains a risk factor in health care, and this recent rally is still somewhat nascent, MacDonald stresses the importance of diversification and prudence on the part of advisors as they discuss this sector’s short-term uptick and long-term prospects.