Healthcare is a big chunk of the market and history suggests that's good news for stocks
- Healthcare is the only sector in the S&P 500 with double-digit gains this year.
- Each time since 1979 that the group has reached its current weighting (15.6%) in the S&P 500, it has begun underperforming relative to other sectors, according to DataTrek Research.
- If history is any indication, the group may begin underperforming and the stock market may start bottoming out.
Healthcare stocks have been on a tear this year, but history shows their rally may be petering out.
With its 11.1% gain this year, the sector is the only group in the S&P 500 to boast double-digit gains in 2018, outperforming other winners like utilities and consumer discretionary.
Its weighting in the S&P 500 has reached a hefty 15.6%, a size that has only been seen during six other periods since 1979 - and that's a reason to grow cautious on the group, according to DataTrek Research.
"The upshot here is that Health Care may look like a safe harbor in the current storm, but its current weighting shows it is very likely at a relative top versus other S&P 500 sectors," wrote Nicholas Colas, co-founder of DataTrek Research, in a note to clients on Thursday.
At the same time, a weighting of that size typically points to upside for the broader market, which would be a welcome sign for investors. After all, the S&P has plunged nearly 9% since topping out in late September.
"It's not hard to understand why Health Care has done so well," Colas wrote.
"Growth oriented managers have to go somewhere when they sell their Tech holdings. Not many other sectors offer reliable growth. Specialty retail used fit the bill, but not as much any more."
Furthermore, the sector has a defensive growth profile, proving to be a haven as the market has gotten a recent injection of volatility due largely in part to international trade uncertainty and Fed rate hikes.
Here is the data DataTrek gathered, with its implications for the broader market below:
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