Since the end of 2010, the S&P 500 Health Care sector has been the stellar performer, gaining 144% in price compared with the S&P 500’s 69% advance, while six of 10 sectors underperformed the broader market. In addition, the health care sector has beaten the 500 in each of the past five calendar years (including this one), something that no other sector can boast. Finally, Health Care’s weighting within the S&P 500 is now 15.5%, which is near its all-time of 15.9%, and is 45% higher than it was in early 2011.
As a result of such a hitting streak, as well as an increase in weight, investors wonder if this super nova sector is about to flame out. We think not, since this defensive sector’s prior peaks coincided with the previous two mega-meltdowns, or bear markets in excess of 40%. This time around, we believe health care’s weight gain is sector specific, not indirectly the result of investors seeking a safe haven.
In addition, a partial explanation for the group’s weighting upsurge is due to widening representation by the high-growth biotechs from a sub-10% weighting in 2001 to a near 22% exposure today. Conversely, Pharma’s weighting fell from more than 70% at year-end 2001 to today’s 42%. Finally, despite the strong price performance, absolute and relative trailing and forward P/E ratios trade within 5% of their long-term medians.