Why You Should Change Your View on Healthcare Stocks

So far this year, healthcare stocks have beaten stocks in all other sectors.

While the S&P 500 (SPY) is up about 18% year-to-date, the SPDR Healthcare Sector ETF (XLV) has gained 27.5%. That’s more than the consumer discretionary sector (XLY, +26%) and the financial sector (XLF, +24%)… and certainly more than the basic materials sector (XLB, +7.7%), which trails the pack.

Are you surprised that healthcare stocks are beating out all other sectors?

I am!

Mainly because the broad market is on a tear this year, and the healthcare sector is notorious for being a low-beta, “defensive” sector. That means, during bad years healthcare typically does “less bad,” and in good years healthcare does “less good.” That’s the rule of thumb, at least.

To test this theory – and to figure out why healthcare stocks are doing so well amidst a strong broad market – I did some research.

Essentially, I wanted to track the performance of the healthcare sector (XLV) relative to the S&P 500 (SPY). Then, I wanted to see how the sector’s outperformance varies in different market conditions… basically, good years versus bad years.

Here’s a chart I built, based on this research.

See larger image

The bars indicate how XLV performed relative to SPY. Positive bars show XLV doing better than SPY; negative bars show the years in which XLV performed worse than SPY.

Note however that this is relative performance. Some years both SPY and XLV were down. Yet, if the losses experienced in XLV were milder than those in SPY, the relative performance bars (above) show as positive.

So, let’s start with 2001 and 2002… bad years for the broad market, as the S&P 500 lost 13.4% and 23.4% respectively. During those two years, XLV did relatively better – in a “less bad” sense – losing only 0.2% and 2.4%.

Next, look at the period between 2003 and 2007… good years for the broad market. The S&P 500 made positive gains each of these five years. XLV also made positive gains each of these years. But, you can’t really say healthcare stocks outperformed the broad market during that period.

XLV beat SPY in 2005 and 2007 (green bars), but only by a narrow margin (an average of 1.8% better than SPY).

2008 shows the same story as 2001/2002: An awful year for SPY, and a “less awful” year for XLV.

2009/2010 show the same story as 2003 to 2007: A strong year for SPY, and a “less strong” performance from XLV.

But this relationship – XLV’s “milder” performance, both positive and negative – 2011 and 2012, and this year the trend continues.

In these years (shown in green), the broad market (SPY) was positive AND the healthcare sector outperformed the S&P 500 by a wide margin, an average of more than 7 percentage points!

I think this is evidence of a secular shift in the healthcare sector. No longer will healthcare stocks be viewed as merely defensive plays that “lose less in down markets.”

And it should serve as a call to action to investors who want to be in the strongest sectors while the market is hot. Now healthcare stocks aren’t laggards in strong markets.

In Boom & Bust, we cover the healthcare sector as it relates to the growing demand from Baby Boomers. But those plays are medium-term. While profitable, they’re not as powerful as what you’ll find in my Cycle 9 Alert portfolio, which offers sharp, short-term gains. The research I’m sharing with you today is just one example of what Cycle 9 Alert subscribers receive and how we ensure we’re invested in the market’s strongest sectors for the maximum gains and minimum risk.

If you missed the fact that healthcare stocks are beating the market this year… Cycle 9 Alert might just be the service you need. Click here to learnrn more.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.