Market Analysis

‘Repeal and Replace’ Debate No Poison Pill

Health Care stocks have moved on from the Affordable Care Act repeal debate.

One year ago, President Trump and the Republican Party were marching down the campaign trail’s home stretch and promising to repeal and replace the Affordable Care Act. It hasn’t happened yet, as gridlock reigns both in Congress and the GOP. Yet it isn’t for lack of trying. Lawmakers have debated numerous proposals. The House even passed one. And President Trump has chipped at the ACA’s implementation with executive orders. The efforts attracted heaps of media attention, complete with concerns over the potential impact on Health Care stocks—both from repeal (hospitals and health insurers) and stalemate (Pharmaceuticals, Biotech and Medical Devices). However, the chatter hasn’t been a headwind: Health Care stocks have outperformed this year and appear poised to do so looking forward as gridlock continues preventing radical change.

While repeal talk can create uncertainty, stocks are quite good at seeing through the chatter and weighing the probability of change. It has been clear for months that the GOP lacks consensus, helping Health Care stocks move beyond the talk and rise on expected gridlock, as Exhibits 1 and 2 illustrate.

Exhibit 1: A Brief History of ACA Repeal Efforts

aca table 

Source: Fisher Investments Research, as of 10/24/2017. H/T: Charles Dornbush

Exhibit 2: Health Care’s Relative Returns in 2017

exhibit 2

Source: FactSet, as of 10/24/2017. S&P 500 Health Care and S&P 500 Total Return Indexes, 12/30/2016 – 10/23/2017.

In our view, investors overestimate the impact of both the ACA and a potential repeal. As the past several years have shown, the industries people feared would be most impacted by ACA—Pharmaceuticals, Biotech and Medical Devices—are nimble, innovative and able to navigate the ACA’s minor taxes and fees. Pharmaceutical stocks have outperformed since the ACA took effect. While future ACA legislation could impact Health Care Providers and Services (e.g., hospitals and insurers), continued gridlock likely limits the scope of potential change. Plus, this industry comprises less than one-fifth of US Health Care stocks by market cap.[i] The more resilient Biotech and Pharma industries combined are 55% of the sector.[ii] To this larger segment of the sector, the repeal debate is mostly noise.

[i] FactSet, as of 10/24/2017.

[ii] Ibid.

If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.