Health Care underperformed during the mega cap led gains of last year but has rebounded since late 4Q and has been the best performing S&P sector YTD (we track sector returns equally weighted). Pharma and Biotech have led so far this year, with Equipment trailing right behind. Importantly, that is NOT just because of the sector’s risk-off factor tilt.
The factor contributing most to Health Care excess returns YTD is Low Volatility, which is consistent with internals across the S&P. What is more interesting is that the industry group contribution to Health Care returns is positive. That is a SHARP reversal from last year when almost ALL (98.7%) of Health Care underperformance was attributed to industry exposure. This year factor, industry, and stock risk are all contributing to Health Care returns, with factor exposure explaining 54.5%. This is a backdrop where factor screening and thematic screening can help find out/underperformers within Health Care.
As we discussed in the Strategy report yesterday (HERE), too strong growth will slow either the easy way – the organically – or the hard way – through tighter financial conditions. We expect more organic slowing, but slowing through tighter financial conditions would support Health Care. The relative performance of most industries within the space benefits from tightening financial conditions as well as a dropping 10-year yield and yield curve backdrop. Life Science Tools & Services has the opposite relationship with macro trends. Organically slowing growth would be better for that industry.
In the full report, we look more closely at the relationship between macro and Health Care groups, and at sentiment trends within the sector. Estimate revisions during 4Q have been trailing their normal pattern and management sentiment toward earnings has been falling across Health Care industry groups. Those are factors we would consider when screening within Health Care.
At the end of the report we list the names that benefit most from either 1) an easy slowing of growth or 2) a backdrop where the Fed needs to tighten financial conditions.
Risk-off Gains Contributing to Health Care Rebound: Health Care underperformed during the mega cap led gains of last year but has rebounded since late 4Q and has been the best performing S&P sector YTD (we track sector returns equally weighted). Pharma and Biotech have led so far this year, with Equipment trailing right behind.
The factor contributing most to Health Care excess returns YTD is Low Volatility, which is consistent with internals across the S&P. What is more interesting is that the industry group contribution to Health Care returns is positive. That is a SHARP reversal from last year when Healthcare groups significantly underperformed relative to their factor exposures. Almost ALL (98.7%) of Health Care underperformance last year can be attributed to industry exposure. That suggests macro headwinds specific to the group. This year factor, industry, and stock risk are all contributing to Health Care returns, with factor exposure explaining 54.5%. This is a backdrop where factor screening and thematic screening can help find out/underperformers within Health Care.
Currently, Health Care Equipment and Pharma are more risk-off exposed. That explains their high return contribution from Low Volatility YTD. Too strong macro readings over the past week, together with hawkish Fed commentary, contributed to the risk-off rotation over the past week. Periods of policy uncertainty should benefit Health Care Equipment and Pharma going forward.
As we discussed in the Strategy report yesterday (HERE), too strong growth will slow either the easy way – organically – or the hard way – through tighter financial conditions. We expect more organic slowing, but slowing through tighter financial conditions would support Health Care. The relative performance of most industries within the space benefits from tightening financial conditions as well as a dropping 10-year yield and yield curve backdrop. Life Science Tools & Services has the opposite relationship with macro trends. Organically slowing growth would be better for that industry.
On a more fundamental front, management sentiment within Health Care is a headwind. Within the S&P 1500, earning sentiment improved the most for Health Care Tech while other industries sentiment dropped over the past quarter, especially Biotech. Dropping sentiment indicates management concerns about earnings and is correlated with negative earnings revisions.
Currently, 4Q EPS revision for S&P Heath Care industry groups have turned positive compared to the beginning of the quarter, BUT they remain lower than normal.
Below we list the S&P 1500 Health Care names that are most positively correlated with both easing financial conditions and yield curve and should benefit from an easy path of slower growth.
The S&P 1500 Health Care names benefiting from tighter financial conditions and a flatter curve are listed below. If the Fed needs to tighten financial conditions to slow growth, these are names most likely to benefit.
