Nothing is certain but – yeah, yeah – death and taxes.
But what about hospitals and toilets?
Well, let’s look at the certainty of hospitals today (we’ll tackles toilets another time). After all, the Obama-care debate centers on the argument that “we’ll all use healthcare at some point in our lives.”
If Obama was a trader, he might say there is a “permanent bid” on healthcare. In layman’s terms, he’s saying:
The DEMAND for healthcare is universal and perpetual.
It’s a pretty powerful concept.
Constant, inelastic demand for healthcare services leads to dampened volatility in healthcare stocks.
Here’s a bar graph showing the Beta – a common measure of volatility – for each sector of the market. The S&P500 has a Beta of 1.0 because it’s the baseline for all comparisons.
You can see the financial sector is the most volatile. The Financial Select Sector SPDR ETF (XLF) has a Beta of 1.49, meaning that it’s 49% more volatile than the S&P500.
The healthcare sector is much less volatile. With a Beta of 0.67, the healthcare fund XLV is 33% less volatile than the S&P500.
Healthcare stocks also hold up better in market downturns. Just look at the percentage drops from October 10, 2007 to March 10, 2009.
So, compared to the broad market, healthcare stocks hold up better in bear markets and are less volatile.
We’ll take anything resembling “certainty” in today’s uncertain times.