Don’s Outlook 1/22/10
Despite a solid start to the latest round of corporate earnings reports, stock markets declined this week due, in part, to legislative uncertainties. After an initial rally on Tuesday to begin the holiday-shortened week, political events took center stage as a Senate election and financial reform proposals had investors reassessing this bull rally and the prospect of higher returns in the short run.
The election of Scott Brown in Massachusetts put U.S. healthcare reform in limbo, if not outright jeopardy. As a result, I expect healthcare sectors and the pharmaceutical industry, in particular, to receive additional investor support over time. Among my favorite healthcare picks are iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) and ICON Healthcare (ICHCX), which have both been long-term holdings in my fundamental portfolios for more than a year.
Healthcare stocks lagged the market during the early part of this rally, but momentum improved as investors turned to undervalued and defensive sectors and the outcome of the much-debated healthcare reform appeared more benign. As it stands, even if the Senate bill passes, the pharmaceutical industry likely only has a 3% – 4% earnings exposure. But if reform fails due to the latest political headwinds, IHE should benefit as this uncertainty is lifted. ICHCX allocates 47% of its portfolio to the pharmaceutical industry, but the fund also has exposure to healthcare services and healthcare providers, making this a more diversified means of gaining an overweight to the sector.
The last time that healthcare reform failed, pharmaceutical stocks outperformed the broader market by approximately 130% over a five-year period. Although we can never count on history to repeat itself, history often serves as a good guide during times of uncertainty. During the last bout of similar uncertainty—when healthcare reform was seemingly at advanced stages—pharmaceutical stocks traded at historic lows, just as they do now. If the reform fails altogether, I expect pharma stocks to outperform again moving forward. But even if the current Senate bill passes, this rather benign reform has limited impact on the pharmaceutical companies comprising IHE and ICHCX. Given the two likely reform scenarios, these stocks look set to get re-rated in the eyes of investors.
Finally, although the IRS is giving most custodians until mid-February to issue their tax documents, Fidelity Investments has informed us that they applied and received approval for an additional IRS extension for their own 2009 Tax Forms. Fidelity’s new deadline for providing tax information is February 28, 2010. This may not affect all account holders, but it is best to expect a possible delay.
