Budget Battle Looming Over Healthcare Sector

by Bryan Perry | September 30, 2013 9:31 am

The next big hurdle for the stock market is the Congressional budget battle that is really a micro-battle over the Affordable Healthcare Act, dubbed Obamacare. If anything could shut down the government, it’s a deadlocked House and Senate over the funding of a program that affects about 20% of the domestic economy.

A defeat, or defunding, of the Act would result in a lack of spending on the healthcare industry. That will have a materially negative impact on most healthcare sectors — including hospital operators, healthcare REITs, insurers, big pharma, medical equipment providers and HMOs. Of the sectors that will likely maintain a bullish bias, biotechs and healthcare information service stand to remain top-performing areas because they bring net positives to the larger space regardless of curtailed government spending.

Of all the sectors noted above, HMOs like United Healtchare (UNH[1]), Wellpoint (WLP[2]) and Cigna (CI[3]) are already under heavy selling pressure as of last week, with fund managers booking heady gains after impressive run for the group. So why risk a major setback when it would pay to be prudent and see where the chips fall when the budget comes down to a vote? Most of the other sectors are holding up well on the positive sentiment from the Fed’s decision to not taper QE.

But even the stronger sectors will get clocked if Obamacare goes unfunded. My advice would be to steer clear of the whole healthcare universe of stocks to avoid a “sell first, ask questions later” blow off. We already saw that happen among income sectors when interest rates jumped: Fear took over, and it has taken three months for sanity to return to those sectors like energy that are far beyond the grasp of interest rates

Bear in mind that even if Obamacare is delayed or defeated, overall spending will still rise year-after-year … just not at the same pace as laid out in the healthcare exchange blueprint that requires corporations to pay into the system by mid-2014. We have no idea what the real costs are or how they will be paid.

There is already tremendous angst over the exemptions being granted to certain corporations and members of Congress that have been granted permission to opt out. Those exceptions have sent a very uneven message to the American public about what’s fair, and suggest that there are two sets of rules at work. If there was ever a time when Congressional leaders that support this legislation should lead by example, now is the time to be out front in full sponsorship.

Whatever happens needs to happen sooner than later. If this budget gap goes unattended to the eleventh hour again, the market will invariably pull back to some degree. How much is anyone’s guess, but it could by as much as 5%-7% depending on several variables. The one thing that’s certain: This will be a historic battle of political will power.

Healthcare stocks as a whole make up a significant portion of the major averages, and with Obamacare set to extend medical coverage to 27 million Americans, it’s no wonder the sector has been one of the market leaders for the past year and big gains have been built on the assumption that Obamacare was a done deal.

If that calculus changes in the next month, investors should steer clear of this mess.

I’ve been keeping a close eye on this healthcare sector and will be watching it even more closely as the showdown in Congress plays out. No matter what happens, it’s vital to be prepared and shift your investments to avoid big losses. And my newest service, Cash Machine Trader[4], will keep investors positioned in the best possible light to take advantage of any market shift and continue a steady stream of income using covered-call trades.

At the time of publication, Perry had no positions in the securities mentioned.

Our InvestorPlace experts have you covered — click here[5] for more analysis on how to invest under Obamacare.

  1. UNH: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNH
  2. WLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLP
  3. CI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CI
  4. Cash Machine Trader: https://order.investorplace.com/?sid=VO8403
  5. click here: http://investorplace.com/hot-topics/obamacare/

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