Macro Wrap – $XLV The Front Runner

by Enis March 25, 2013 8:01 am • Commentary

My biggest regret in 2013 is not being longer health care stocks, and not doing more bullish options trades in the sector.  It’s still my favorite sector long-term, due to secular trends and fundamental valuation.  Health care is also insulated from many concerning structural deficiencies in the current economic environment, both domestically and internationally.  But regardless of my favorable view and despite my positioning,  I’ve been surprised by the roaring start by the sector in 2013.

Here’s the relative performance in the U.S. stock market by sector, courtesy of the team at Global Macro Monitor:

Screen Shot 2013-03-25 at 7.49.39 AM


A nearly 10% gain for the SPX in the first quarter of 2013 is impressive on its own, but health care is the best performing sector, up more than 12.5%.  Moreover, health care is up 50% since the Oct. 2011 low in the broader market, once again fairly dramatically outperforming the SPX.  Health care has been a bull market leader in the past 18 months, not a phrase you hear much in the annals of stock market history.

Josh Brown at The Reformed Broker blog has a good post discussing the general trend over the past several years to market Low Volatility ETFs and Low Volatility funds in general, which naturally favor defensive sectors like utilities and consumer staples.  He makes the point that valuation has gotten stretched in these sectors as a result, and I agree whole-heartedly.  However, health care remains the one defensive sector, despite its recent run, that looks fairly valued to me.  Buying the sector here is not the best entry, but it’s the one sector I would hold for a 10 year investment with little concern to the squiggles in the interim.  As for the other defensive sectors, their current valuation levels are laughably high, and the stocks are setting up for a severe shakeout eventually.  Their valuations no longer render them defensive.  They’re faux defense with little offense to boot.