CWS Market Review – November 26, 2024

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Healthcare Stocks Have Lagged the Market for Two Years

The stock market closed at another new all-time high today. The S&P 500 has closed higher for seven days in a row. This was the index’s 52nd new high for this year. There were zero last year. The big caps did the heavy lifting today while the Russell 2000 was down by 0.73%.

Lately, I’ve been asking, what’s going on with healthcare stocks? For years, this was one of the best-performing sectors on Wall Street. Not lately!

Make no mistake, there’s a lot to like about healthcare investing. The industry is heavily supported by the government. That’s a great customer to have. The sector is also helped by demographics. All those Baby Boomers need to have their joints replaced, and not how they used to have their joints replaced.

Investors also like that healthcare performance tends to be steady. There are several healthcare companies who regularly deliver consistent gains. That makes analyzing these stocks much easier. I love many cyclical stocks but those tend to follow boom-and-bust cycles. With healthcare, the lines on the graph are nice and smooth.

But healthcare has been badly lagging! Look at this chart below. I’ve included the S&P 500 Healthcare ETF (XLV, in black) along with the S&P 500 ex Healthcare ETF (SPXV, in blue), meaning everything in the index besides healthcare.

Over the last two years, healthcare stocks have lagged the rest of the market by nearly seven to one. Healthcare stocks currently make up about 11% of the S&P 500. That means that if you combine the two lines above at a nine-to-one ratio (nine black and one blue), that roughly makes up the S&P 500.

Until two years ago, just about any lagging performance from healthcare was a reliable signal to buy. Part of the reason for healthcare’s poor performance can be chalked up to the superior performance of other sectors, particularly large-cap tech.

Some investors think that healthcare stocks were held back by an unfriendly administration in Washington. That could be, but healthcare stocks continued to lag in the days after the election. To be fair, the sector has acted a little better in the last week.

There’s also a far simpler explanation: perhaps healthcare stocks were badly overpriced two years ago. For example, shares of Eli Lilly (LLY) have broken down over the past few months, and it’s still very pricey.

There are currently 62 stocks in the S&P 500 healthcare sector. On our Buy List, we own four of them: Abbott Labs (ABT), Cencora (COR), Stryker (SYK) and Thermo Fisher Scientific (TMO). Over the year, Stryker has been a particularly successful stock for us.

I also suspect that healthcare has done poorly because defensive stocks have been on the outs on Wall Street. That will quickly change in a recession. When things get rough, investors flock to those steady stocks.

I always take notice when an entire sector flounders, especially one that has done so well over the years. That’s a good place to find bargains. For now, if you’re willing to have a little patience, the healthcare sector may be a rich source of long-term winners. I obviously like our four the best. When the cycle turns, I expect to see some very nice gains.

Consumer Confidence Rises to a 16-Month High

Wall Street had some good mixed news today. On the positive front, consumer confidence rose to a 16-month high. This is important to watch. Without confidence, the economy can’t do much. For November, the consumer confidence index increased to 111.7. That’s up from 109.2 for October. Wall Street had been expecting 111.0.

What’s the reason for the optimism? The labor market is still holding up well, although I’d like to see greater wage gains. Also, the outlook for inflation is much better than it was two years ago.

Within the consumer confidence report, there’s also an index of consumer expectations. That index rose to 92.3 which is the highest reading in nearly three years. Earlier this year, the expectations index got very low.

While that’s the good news, the bad news is that the Census Bureau said today that the sales of single-family homes dropped to its lowest level in nearly two years. Clearly, the recent storms impacted these numbers. For October, new home sales fell by 17.3% to 610,000. Wall Street had been expecting 725,000.

Sales in the south fell 28% to 339,000. You have to go back to the early days of Covid to find numbers that bad. Home prices are still going up. Last month, the median price for a new home sold was $437,300.

Tomorrow, the government will update its numbers for Q3 GDP growth. Last month, we got the initial report, and it said that the U.S. economy grew in real annualized terms of 2.8%. That’s not bad. I don’t think the revision will be very different than the original report.

What about Q4? We’re a little over halfway through Q4, and the Atlanta Fed’s GDPNow model estimates that the economy grew at a real, annualized rate of 2.6%. That estimate was recently increased by 0.1%. It will be adjusted again tomorrow. If these numbers are right, then we successfully averted a recession in 2024. That would have surprised a lot of people 18 months ago.

I’ve noticed a growing divergence between what the Federal Reserve expects and what Wall Street expects. The Fed keeps talking tough about interest rates, but market participants don’t buy it. Here’s a look at the Fed funds rate adjusted for inflation:

The Fed meets again in three weeks, and traders think there’s a 63% chance that the Fed will again cut rates by 0.25%. That’s probably too low.

After that, the markets see the Fed cutting rates twice next year, but the Fed sees itself cutting four times next year. When in doubt, I prefer to side with markets over economists. This afternoon, the Fed released the minutes from its most-recent meeting. In it, the Fed confirmed that it’s looking to lower rates but at a gradual pace. As you know, I’m an expert in the bizarre, convoluted dialect known as Fedspeak. I’ll try to translate their foreign language into regular English.

The Fed said that if the current situation continues to improve, then “it would likely be appropriate to move gradually toward a more neutral stance of policy over time.” Note that in the Fed’s mind, it’s not lowering rates but it’s really taking back the rate hikes from 2022-2023. Interestingly, the Fed didn’t say anything about the election or possible tariffs.

The Fed members discussed the “neutral” interest rate. This is the idea that there’s a magic rate of interest and if you go above it, you choke the economy. But if you go below it, then you flood the economy with dollars. The hip econo-name for the neutral rate is R-Star.

The only hitch is that we don’t know where the neutral rate is. We can only guess. Austan Goolsbee, the Chicago Fed President, started calling it “R-Sasquatch.” There’s a general consensus that wherever R-Star is, we’re probably above it.

The minutes said, “Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.” In other words, they’re as confused as everyone else.

Over the coming few months, I suspect the Fed will gradually reel back its plans for rate cuts for next year.

Milei Looks to Free Argentina’s Economy

Last year, I told you about Javier Milei, the libertarian outsider who was looking to become the president of Argentina. Since then, Milei was elected and he’s upending the political establishment.

He’s also become popular with investors. Bloomberg notes that the Argentina ETF (ARGT) has experienced massive inflows. Last week, ARGT had inflows of $144 million. The ETF has performed well.

I think investors are genuinely shocked that Milei is following through on what he promised. Since Mikei took office, the assets of ARGT have increased sevenfold. The economy in Argentina is getting better and inflation is finally cooling off.

I have to confess that I’m fascinated by Milei and his attempt to fundamentally change his country. It’s like a real-world experiment in macroeconomics.

He’s not done yet. The next big hurdle for Milei is removing capital controls. The fear is that once lifted, money will stampede out of Argentina. That’s happened before when Argentina has moved toward more market-friendly policies. Still, there’s good reason to believe that Milei is an exception.

The capital controls force the currency to be far stronger than it is on the open market. The government tightly controls the exchange rate. Buying foreign currency for savings is limited to $200 per month.

Of all his reforms, ending capital controls could be the most difficult for Milei. The reason is that it’s most likely to cause large-scale disruptions within the economy. Milei probably won’t tackle capital controls for several more months.

Milei is definitely worth following. Argentina is taking a big risk. If he’s right, Milei may offer the blueprint for how other countries can provide shock therapy to their economies.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on November 26th, 2024 at 7:09 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.