Healthcare Sector Increases 14.1% In Q3

Healthcare Sector - Without GE Dow Increases 9.3%

Healthcare was the best sector in Q3 as it increased by 14.1%. That was its best quarter since Q3 2013. The next two best sectors were the industrials and tech which were up 9.7% and 8.5%.

While tech has changed its makeup, Apple remains in the sector. Apple played a huge role in tech’s performance as it was up 21.95% in Q3. On Friday, the best performers were real estate and the utilities which rose 1.31% and 1.51%.

Financials and materials were the worst as they fell 1.06% and 0.68%.

The Nasdaq was up 5 basis points on Friday and 7.2% for the quarter as it was its best performance since 2017. Dow had a comeback as it increased 9.3%.

It certainly was helped by the fact that GE was eliminated as its stock is down 12.95% in the past month, while Walgreens was up 6.81% in the past month.

This exhibits why indexes move higher. They eliminate the failing companies and add growing companies. By the time companies make the index a lot of their growth has been realized. However, they also have less risk.

The Russell 2000 had the worst quarter as it was up 3.26%.

While American growth is still strong, investors haven’t been respecting the risk a trade war presents.

They reversed the short Dow, long Russell 2000 trade. The Shanghai Index only fell 0.92% in Q3. It has increased 6.39% since September 17th despite the growth slowdown in China.

Healthcare Sector - Best S&P 500 Quarter Since 2013

The S&P 500 was flat on Friday, but not for the quarter as it was its best one since Q4 2013.

S&P 500 was up 7.2% in Q3. It shirked worries about a hawkish Fed, an economic slowdown, tariffs, valuations, and the mid-term elections.

As usual, earnings growth drove stocks higher while the headlines proved to be meaningless.

The CNN Fear and Greed index is at 47 which still supports my neutral stance on equities in the near term.

I still think a trade war is a big potential risk, but we must acknowledge how over 20% earnings growth can soothe all fears. On September 30th, the deadline for America to make a trade deal with Canada will expire.

I’m not sure of the legality of Mexico having a separate deal from Canada. The lack of a deal is bad for trade since Canada is America’s 2nd largest trading partner.

Healthcare Sector - 24 Basis Points Separate The 10 & 2 Year Yields

You would think yields fell and the curve flattened with that sector action. But the 10-year yield rose 1 basis point and the 2-year yield fell 1 basis point. This means the curve steepened.

With the 10-year at 3.06% and the 2-year at 2.82%, the difference is 24 basis points.

Even with oil closing at $73.25, th10-year yield still hasn’t surpassed its cycle high of 3.11%. It needs to move higher to prevent an inversion. The number of anticipated rate hikes this cycle continues to grow.

The chart below shows various country’s 10-year bond yields’ movement in the past month.

Only the British Gilt has had most of its increase caused by increased inflation expectations. American treasuries had the largest increase. They were up nearly 25 basis points. It’s tough to see the selloff continuing at that speed in October.

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Healthcare Sector - Momentum Supersedes Valuations

The two charts below are a very odd combination. As you can see from the chart on the left, 36% of respondents think global equities are overvalued. 50% say they are fairly valued. Only 14% say they are undervalued.

I’ve always thought saying an asset is fairly valued is a nice way of saying it’s too high. Generally, stocks move up. If they are fairly valued, some say the bull market will either stall or stocks will become cheap. Thus meaning a bear market is coming.

Even though few investors think global equities are undervalued, few investors are willing to predict stocks will fall.

Less than 10% of respondents think stocks will fall at least 10% in the next 3 months, while over 30% of respondents think they will increase between 5% and 10%.

This is an anonymous survey, so there’s no fear over calling for a bear market and being wrong.

Investors genuinely don’t want to bet against the momentum. The best answer is probably the most common one as there is a 10% range to be correct. The MSCI all-country world index was up 4.42% in Q3, meaning it underperformed the S&P 500.

It’s only up 2.05% year to date and it’s still down 4.23% from its January peak.

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Healthcare Sector - GDP Estimates Remain Solid

As you can see from the chart below, the ECRI leading index had its year over year growth improve to 0.4%. While core PCE inflation didn’t accelerate when it was faced with very easy comparisons, the ECRI index has.

The current comparisons are easy since year over year growth in September 2017 was flat. This will change in October which suggests the growth rate will fall to negative in the next few weeks. That strengthens the slowdown signal which has been wrong.

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The CNBC rapid update shows Q3 GDP growth is expected to be 3.2% according to 13 estimates.

Atlanta Fed GDP Nowcast expects 3.6% growth. This is down from 3.8%. The personal income report caused the estimate for real personal consumption expenditures growth to fall from 3.7% to 3.5%. That would be down from Q2’s growth rate of 3.8%.

We’re at the point in the quarter were these estimates start to become very accurate.

The St. Louis Fed GDP Nowcast is the most optimistic as it expects 3.83% growth. I’m surprised that the often pessimistic NY Fed Nowcast had its estimate increase from 2.26% to 2.47%.

The fact that the durable goods report helped the estimate by 13 basis points makes sense. However, the estimate being so low to start with doesn’t. I can never know for sure where it will head next. The estimate for Q4 growth increased from 2.66% to 2.92%.