Written by 1:28 pm WTF is going on with the Economy?!

Why Healthcare Stocks aren’t Crushing it in a Pandemic

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Logic would say that if there’s one sector that would do amazingly-well in a pandemic, it’s healthcare. 

It would kind of make sense. 

If a pandemic is a health crisis, then the sector that can save it should be rewarded handsomely. 

It turns out that isn’t quite the case.  

In fact, if you compare indexes of healthcare stocks to the overall market, this vital industry either barely kept up or even underperformed, with the tech industry being last year’s undisputed winner.

Strange, right?  

Here’s why. 

Lockdowns killed the healthcare economy, too.

Viruses circulate all the time. 

Yet very few shut down the planet. 

This one, as we know, is different. 

COVID-19 is particularly nasty for people with underlying conditions or age-weakened immune systems. 

Unchecked, seriously ill individuals will flood hospitals, overwhelm our primary care, and force all medical attention on fighting the pandemic. 

This ‘freeze’ meant that consumption of all sorts of medical equipment, drugs, and other related pieces dropped.

When consumption plummets, sales and prices sink, too. 

Fundamental stock traders believe a share’s price is worth the company’s current and future sales revenue. 

Since almost no healthcare company exists solely to serve a pandemic, most of the industry saw their income and, importantly, their stock price fall.

The unintended side-effects of masks, social distancing, and obsessive hand washing

Over the past ten (:o) months, the vast majority of us have been doing some form of social distancing, handwashing, and mask-wearing.  

In addition to helping prevent the spread of a highly infectious coronavirus, these measures also stopped other common illnesses from taking hold

Cases of the common flu, colds, stomach bugs, and other transmittable but easily treatable diseases fell.  

(By the way, did you know that many common colds are coronaviruses as well? Unlike the novel one making everyone’s lives miserable, these are human coronaviruses that are more annoying than deadly). 

Since people haven’t been getting sick, they’ve stopped buying over-the-counter treatments like cough syrup and painkillers and stopped visiting the doctor. 

An overall healthier society hurt the financial performance of pharmaceutical companies and private health centers.   

This chart compares four different indexes since early last year: The benchmark S&P 500 (blue) of the largest US companies, the NASDAQ 100 (red) of the largest tech companies, as well two indexes of Healthcare firms in the US (Green) and Europe (Yellow). It looks like tech “crushed it.”

When vaccine efforts prevent diversified drug development

As soon as it became clear that we were in a pandemic, many drug makers and biotech companies dropped their projects to focus on vaccines and other coronavirus treatments. 

This sudden shift should be expected. 

We have everything to gain and little to lose by plowing all of our resources into beating COVID-19.

From the perspective of fighting the pandemic, this laser focus on Coronavirus vaccines is excellent news.

From an investor’s perspective, though, the view is different. 

However, like investors, drug manufacturers make diversified ‘bets’ as part of their business model. 

Drug development is a risky process, where few candidates make it past testing stages. 

Those that do will go through rigorous trials and approvals, essentially waiting their turn for regulatory review.* 

To reduce these risks, drug manufacturers develop multiple treatments simultaneously, hoping that at least one of them will pay off as a winner.

Since drug manufacturers put their ‘eggs in one basket over the past year,’ investors saw these companies’ stocks as riskier. 

Not everyone has the same risk tolerance. 

People and funds who believed that this lack of diversification was harmful sold their shares. 

As they sold, the stock price fell, bringing down the industry’s overall value with it.  

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Why it’s not all bad news for the healthcare industry. 

Alright, so let’s move past the gloom and doom to look on the bright side. 

First, the pandemic has been a huge accelerator for all sorts of medical and pharmaceutical research.  

New products such as mRNA vaccines will revolutionize the way we treat many diseases

Practically all drug manufacturers will benefit from these and other insights, creating a new blue ocean for them and their investors.

Second, many of us have held off on non-essential medical care during this period. 

After we get past the pandemic, there will likely be a rush as people finally get those ailments taken care of.  

When that happens, demand for all sorts of medical supplies, drugs, and facilities will jump. 

Third, the world still has an increasingly aging population.

As the boomers and their parents grow older, they will need more medical care. 

The increased demand from this demographic alone provides ample opportunity for the healthcare industry. 

Finally, there will be a post-pandemic reckoning about how we as a society address healthcare. 

There were serious deficiencies in care levels, supplies, and personnel resulting from years of neglect in almost every country on the planet.

Governments will likely invest billions into fixing these short-comings, with healthcare companies directly benefiting. 

There are indeed significant changes and lengthy debates on the horizon.

To be fair, healthcare as an investment hasn’t been a loser during the pandemic; far from it. 

That said, we do find it interesting that healthcare hasn’t been the standout investment that tech has.  

It goes to show that nothing in investing nor life is that straightforward. 

Understanding that, however, is easier than we think. 

* It’s important to remember that regulators also saw their schedule freed up for review when drug makers pulled their other efforts. This situation, along with a pandemic creating a ripe testing environment, is why Coronavirus vaccines are getting to the market quickly.

This was issue 037 of our weekly Economics for Expats newsletter. Subscribe now, and join thousands of others living abroad learning about what makes our economy go.

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