I don’t know about you, but this market stresses me out. Rising blood pressure is correlated to my posts on X, alongside rising risks of an imminent credit event. Which is exactly why I’m getting increasingly bullish on healthcare stocks for a relative trade.
When we look at the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) relative to the Technology Select Sector SPDR Fund (NYSEARCA:XLK), healthcare appears to be making a comeback as tech weakens.
Are we on the cusp of a defensive growth rotation?
What Is Sector Rotation?
Sector rotation is a strategy that investors and fund managers use to beat the market. Essentially, they shift their investments from one sector of the economy to another. This strategy is based on the idea that different sectors perform well at different stages of the economic cycle. During growth phases, allocators want more exposure to technology and higher-beta parts of the marketplace.
During contractionary phases, the way to play defense is through higher-dividend, more stable sectors of the economy that people always need, like healthcare.
From a trading perspective, I think healthcare makes a lot of sense. Stocks broadly look vulnerable, the Federal Reserve doesn’t appear to be done with hiking rates, and tech stocks looks like they may finally have cracked. And let’s not forget that the yield curve is still screaming recession.
This is precisely the kind of economic cycle that healthcare can relatively outperform in as it has in prior economic contractions.
The Bottom Line on Healthcare Stocks
Bottom line? I think if you want to remain bullish on stocks, it makes sense to reduce exposure to tech stocks and prepare for a more volatile environment which should be a relatively positive one for healthcare. Just keep in mind that in a recession, the role of healthcare in a portfolio should be to lose less rather than actually make money.
Certain ETFs like the Vanguard Healthcare Index Fund (NYSEARCA:VHT), XLV, and other large-cap healthcare stocks are preferrable to biotech stocks. That is because they are defensive and non-speculative compared to biotech.
At the end of the day, AI may be taking over the world, but the world still needs healthcare for humans to survive — and hopefully thrive — in a risk-off period ahead.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
