Friday, January 22, 2010

Healthcare Stocks Continue to Ignore Healthcare Reform

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

During my 22-year career, there have been countless macro events that the stock market knew was coming. As far back as 1990 when Iraq invaded Kuwait, the market (and the world) knew of the deadline that the U.S. placed on Iraq to vacate Kuwait. With each passing day, as cargo plane after cargo plane landed in Saudi Arabia with troops and supplies, and more and more ships anchored offshore in the Persian Gulf, the point of no return got closer and closer.

When then-Secretary of State James Baker and Tariq Aziz from Saddam Hussein’s regime emerged from a last-ditch effort meeting and told the world that no deal had been reached in early 1991, the market reacted negatively, as expected, with war just days away. But a funny thing happened on the way to collapse, stocks stopped going down and began to stabilize. It was widely anticipated that a market sell off would ensue as the first bullets were fired.

As stocks rallied moderately into the day of reckoning, it was pretty hard to believe with a war against one of the most powerful armies on earth on their home turf imminent. And when the U.S. began the air assault on Jan. 16, 1991, the stock market took off like a rocket the very next day and never, ever looked back.

The point of this example and others like it is that the stock market is the single greatest discounting mechanism in the world. Investors shouldn’t try to anticipate what a reaction might be on an event. Just let the market tell you. As history has shown, fighting the tape or trend has been a futile exercise in most cases.

Since the presidential election in 2008, health care reform has been on the front burner for Congress and Barack Obama. I’ve written many articles since the inauguration arguing that no watershed reform was going to take place, simply because the health care stocks showed no sign of any concern. As the voices grew louder and both houses of Congress began crafting legislation, I remained firm in my conclusion, again, because the health care group was behaving extremely well.

If there was any chance that health care reform was going to dramatically change the landscape, those stocks would have seen significant institutional distribution, not the almost melt up move they’ve seen since November. It’s almost as if the sector has arrogantly thumbed its nose at Congress’ attempted fixes.

Whether or not meaningful health care reform passes, and I think almost everyone agrees we need some kind of reform, the relevant takeaway is that the stock market snuffed this out long before anyone else, just like it did with the first war in the Persian Gulf in 1991.

Keep an eye on the markets for future events to give hints as to the outcome!

Please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

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