Markets Brief: Healthcare Stocks Still Offer Value for Patient Investors

Healthcare Stocks Are Still at Discounts

The Morningstar US Market Index rose 1.0% last week, led by healthcare stocks, which gained 4.4%, bolstered by a rebound in Eli Lilly LLY. Lilly stock rose 12%, recovering most of the ground it lost following the previous week’s disappointing trial results for its oral weight loss drug Orforglipron. Meanwhile, UnitedHealth Group UNH rose 21.2% on news that Berkshire Hathaway BRK.A had acquired a $1.6 billion stake in the company. Value-focused investing appears to have returned to Omaha. Healthcare still continues to offer plenty for patient investors, with stocks in the sector trading at a 7.3% discount to their fair value estimate on average.

Beware of Misleading Investor Sentiment and Overtrading

This reversal was also evident elsewhere. The consumer defensive sector fell 0.6%, having risen 2.0% the previous week, while small companies led their larger peers by 1.5%. While these moves will gladden investors who take a fundamental approach, it reminds us that sentiment can change rapidly even without a significant shift in economic conditions. These swings tend to be amplified when market liquidity is suppressed during holiday periods. It is consequently important to be patient and avoid making decisions based on price changes during these times.

The benefits of Buffett-like patience are illustrated in Morningstar’s latest “Mind the Gap” report, which highlights the returns sacrificed through trading too frequently. We find these costs can be higher than the fees professional investors charge for managing portfolios. Consequently, the benefits of adopting a low-cost investment strategy can be negated by frequent changes.

Overseas markets rose over the week, with the Morningstar Developed Markets ex US Index up 1.9%, ahead of the Morningstar Emerging Markets Index, which was up 1.5%. These gains were enhanced by a 0.4% decline in the US Dollar Index following the release of the most recent inflation data.

Data Points to an Interest Rate Cut in September

While both headline and core Consumer Price Index inflation rose from the previous month, in line with expectations, the less-watched Producer Price Index was much higher than expected. It rose 0.9% over the month, compared with estimates of 0.2%.

Although some commentators cited this as evidence of tariff-driven inflation emerging higher up in the supply chain, a more detailed analysis suggests wholesalers have been increasing their profit margins rather than simply passing on price increases. Consequently, expectations of a September interest rate cut remain high.

All Eyes on Jackson Hole

With little economic data to draw attention this week, economists will be focused on the Federal Reserve’s annual symposium at Jackson Hole, which starts Thursday. This gathering of central bankers, policymakers, and economists from across the globe is likely to be watched more closely for comments on the central bank’s independence than the stated theme of “labor markets in transition.”

As Hal Ratner reminds us in this article on the replacement of the BLS commissioner, issuers of US securities have not historically had to pay a political risk premium. The 10% fall of the US Dollar Index this year demonstrates that assets can quickly revert to their fair value when confidence is undermined.

Diversification Remains Key

Although concentration in US equities (especially technology-driven companies) has benefited investors over the last few years, the tariff-driven turmoil in April was a good reminder of the benefits of diversification. As US stock prices have recovered, investors have been offered another opportunity to diversify while the price of the US market is relatively expensive compared with other markets and confidence remains high.