The Outlook For Health Care

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OCEAN CITY – Just a few years ago, when the economy was rolling along, investors paid scant attention to the stocks of pharmaceutical makers, health insurers, medical-device makers and related companies. Many of the companies were plagued by waning profitability and the threat of tighter government scrutiny. But in today’s ailing economy, the health care sector has revived. The question is, with the huge relief package for the financial services industry under way, how long will the sector remain strong? Merrill Lynch experts believe the prospects look good for growth.

“Most people have been very negative on health care during the past few years,” said Brian Belski, Merrill Lynch’s Chief U.S. Sector Strategist.

But much to investors’ surprise, he notes, health care outperformed the broader market last year for the first time since 2003. The sector delivered returns of 6.7%, compared with 5.5% for Standard & Poor’s 500-stock index.

Before the mid-1990s, when the S&P designated health care a separate sector, the stocks of pharmaceutical companies, health insurance companies and biotechnology firms were part of consumer staples, the most likely defensive sector of all.

 “People need pharmaceuticals and health care to live,” Belski says. “During tough economic times, they divert spending from discretionary items in order to have enough money for the staples.” So those stocks generally tend to have built-in protection when the economy slides and are also likely to recoup their losses more quickly if they are affected by market conditions.

During the six recessions since 1969, health care and consumer staples have always been the first two sectors to recover. For example, health care gained almost 30% in the year after the Federal Reserve began cutting interest rates to lessen the blow of the recession of 1990-91.

Following that pattern, as the economy has weakened this year, many health care companies have done well. But health insurance and managed-care company stocks have lagged. Consequently, Belski recommends investors focus on the manufacturing side of health care, such as biotechnology, medical devices, life sciences and select pharmaceuticals.

Talk to your financial advisor about whether health care stocks might represent a smart investment solution for your portfolio in today’s challenging economic environment.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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