Published October 5, 2018
Since July, one sector has ruled all in the stock market. While the large-cap Dow Industrials, S&P 500, and Nasdaq all flirt with record highs, you might be surprised to find that neither technology nor consumer stocks, the long-time leaders of this market advance, are the current belles of the ball. That distinction goes to healthcare stocks.
Chart 1: Healthcare stocks lead the way in recent months
That healthcare stocks have been leading the market says something as healthcare is a step more cautious than tech and consumer stocks. Investing in healthcare is often a way to be invested in stocks while also playing a little bit of defense. This is because healthcare stocks, as a sector, tend to be a little bit less impacted by the economic cycle with less downside than the market overall. It is for this reason that the healthcare sector comprises a heavy portion of our FPResearch model portfolios. (Our FPResearch website offers a broader, more diversified version of our TimingCube methodology; with many more sector-specific models to further limit our risk.)
Chart 2: Healthcare performance has been straight UP since July
Given the persistence of this trend, it’s fair to expect that once this trend breaks, the market overall might encounter some trouble. Long live healthcare stocks!
Stocks kicked off the week and month of October with an optimistic step Monday on news of a NAFTA “replacement” trade deal with Mexico and Canada. The deal now awaits Congressional approval. As with all of these trade deals, large-cap stocks saw greater benefit. The Dow and S&P 500 both ticked higher while other indexes slid. That same song played Tuesday with the Dow Industrials rising +0.5% while small-cap stocks tumbled -1%. Interest rates zipped higher Wednesday when the ADP employment report showed stronger than expected job growth leading investors to be concerned about accelerating wages. Stocks gave up solid gains midday to close just above flat. The interest rate concerns bled over into Thursday’s trade to keep stocks under pressure. Adding to the negative sentiment was a report that China had implanted a “spy chip” in servers at Apple (AAPL) and Amazon (AMZN). The Nasdaq slumped -1.8% while the S&P and Dow held their losses under -1%. The losses continued Friday with the monthly jobs report roughly confirming the ADP report published earlier in the week. Major technical support held for the indexes, however, at least for Friday, with the market recovering in the afternoon to cut its loss roughly by half. Nevertheless, stocks lost an additional -1%, with the Nasdaq dropping more than the S&P 500 or Dow Industrials – continuing the week’s trend.
Investors saw a substantial divergence in performance this week with the S&P 500 (SPY) holding its 10-week trendline while falling -1.00% for the week. The Nasdaq 100 (QQQ) tried to cling to the 180 level that served as support one month ago. The index gave up -3.04% this week to return to their mid-August price point. Small-caps (IWM) were unable to halt their advance, however, sliding all the way to their 200-day moving average before finding buyers. Small-caps crumbled -3.77% for the week and saw little of the Friday afternoon rebound experienced by the other indexes.
Warm wishes and until next week.