Markets Brief: Time to Look at Healthcare Stocks Again?

The Morningstar US Market Index declined 2.1% last week, with healthcare especially weak, down 5.8%. Given the strength of recent results from companies in this sector, it seems likely that this is a response to the US election. While it is necessary to consider the impact of the next presidential administration, it is important to remember that there are a range of potential outcomes, and we should avoid anchoring our decisions on one scenario. With healthcare companies trading well below Morningstar’s estimates of their fair values, a lot of bad news is baked into the price, increasing the probability of a positive surprise.

China and Tariffs

The Morningstar China Index lost 6.3%, suffering from a pessimistic assessment of China’s latest economic stimulus package and concerns about future trade with the US. Although ongoing trade tensions are likely to grab headlines, it is worth noting that Chinese exports to the US accounted for 2.8% of China’s GDP last year, down from 4.4% at the start of the first Trump presidency. The ongoing impact of tariffs is therefore likely less important than the valuation of the Chinese companies and the strength of the domestic economy.

One of the key challenges facing the economy is the continued weakness in the housing market. However, Morningstar’s China property analysts, Jeff Zhang and Kathy Chan, see some positive developments and attractive opportunities.

Fed Expectations Are Shifting

Last week, the core Consumer Price Index was in line with expectations at 3.3% over the last year. As inflation remains above the Federal Reserve’s target level, investors appear to be paring back their expectations of future interest rate cuts. A majority continue to expect a 0.25-percentage-point cut when the central bank meets on Dec. 18. However, the probability that rates remain at their current level has increased over the last few weeks. While the timing of the next move in interest rates is unlikely to be significant for long-term investors, shifting sentiment could create price volatility.

Bitcoin: For Eating or Trading?

Bitcoin had one of the most eye-catching price moves following the election, rising to around $91,000 from $68,000. This appears to reflect a belief that the incoming Trump administration will be more supportive of cryptocurrency. While this may be true, the dramatic change in price underscores the difficulty of estimating the fair value of an asset that’s primarily a vehicle for speculation.

Seth Klarman illustrates this point in his book Margin of Safety, in which he describes a boom in the price of sardines because of perceived scarcity: “One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.’”

As an investor, it is always worth considering what value you would ascribe to an asset if you could not sell it and had to own it for an extended period. This is fairly straightforward for conventional investments; a company could continue to operate and produce cash flow for its owners, bonds could continue to pay interest, and a property could generate rent. However, trading sardines and their financial equivalents would merely leave a bad taste in your mouth. Cryptocurrency investors therefore need to reassure themselves that they own “eating sardines.”

It’s Nvidia Time Again

In a week with few significant economic announcements, results from Nvidia NVDA will likely take center stage. As a bellwether AI company, Nvidia’s progress will likely have a broader impact on the technology and communications services companies that rely on the technology to power future growth. Find out what analyst Brian Colello expects.

Highlights of this Week’s Market and Investing Events

• Tuesday, Nov. 19: October New Residential Construction report, earnings from Walmart WMT, Lowe’s LOW
• Wednesday, Nov. 20: Earnings from Nvidia NVDA, Nio NIO, Target TGT, Snowflake SNOW
• Thursday, Nov. 21: October Leading Indicators, October Existing Home Sales, earnings from Baidu BIDU
• Friday, Nov. 22: November Purchasing Managers Index Composite

For the Trading Week Ended Nov. 15

• The Morningstar US Market Index fell 2.1%.
• The best-performing sectors were financial services, up 1.45%, and energy, up 0.71%.
• The worst-performing sector was healthcare, down 5.79%.
• Yields on 10-year US Treasury notes rose to 4.43% from 4.30%.
• West Texas Intermediate crude prices fell 5.15% to $67.05 per barrel. 70.69

Stock Highlights for the Week

• Of the 882 US-listed companies covered by Morningstar, 240, or 34%, were up, four were unchanged, and 455, or 65%, were down.

Which Stocks Are Up?

Bloom Energy BE, Walt Disney DIS, Block SQ, Coinbase COIN, and Palantir Technologies PLTR were the top performers among US-listed stocks covered by Morningstar analysts.

Best-Performing Stocks of the Week

Which Stocks Are Down?

Groupon GRPN, Monolithic Power Systems MPWR, SolarEdge Technologies SEDG, Moderna MRNA, and Shoals Technologies SHLS performed worst among US-listed stocks covered by Morningstar analysts.

Worst-Performing Stocks of the Week