Health care stocks posted high-percentage gains on Wednesday, with strong buying interest underpinned by a split Congressional vote that sharply lowers the odds for "Medicare for All" or a government expansion of mandatory benefits. The SPDR Health Care ETF (XLV) jumped to an all-time high, clearing resistance going back to January, while health plan carriers all posted outsized gains. Even hospitals had great sessions, despite headwinds that will linger far longer than political conflict.

Key Takeaways

  • Health care, drug, and biotech stocks posted strong rallies on Wednesday, underpinned by mixed election results.
  • Many health care, drug, and biotech stocks hit new all-time highs.
  • The upcoming Supreme Court decision on Obamacare has the potential to unleash sector chaos, coming in the middle of open enrollment.

Expect sector volatility to escalate this month, with the Supreme Court expected to issue a decision on the legality of the Affordable Care Act, aka Obamacare. A broad rejection could ignite chaos, coming in the middle of open enrollment and legal battles between Trump and Biden. Insurance carriers have posted strong profits since the coverage began and could lose a major revenue source that also ignites economic hardship at local health facilities.

Biotech and pharmaceutical stocks rallied as well, expecting measures to control prices to fade in coming years. Both Trump and the Democrats gave lip service to lower prices during his first administration, but it never yielded legislation. There's little Joe Biden can do to change that equation in the next four years if he's certified as president, and the Republican-controlled Senate may have little motivation in handing him legislative accomplishments.

The Affordable Care Act (ACA) is the comprehensive health care reform signed into law by President Barack Obama in March 2010. Formally known as the Patient Protection and Affordable Care Act – but often just called Obamacare – the law includes a list of health care policies intended to extend health-insurance coverage to millions of uninsured Americans.

Chart showing the share price performance of the SPDR Health Care ETF (XLV)
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The SPDR Health Care ETF (XLV) fell to an eight-year low two months after Obama took office and turned higher, entering an uptrend that reached the 2008 high at $37.89 in 2012. A breakout eased into a rising channel, posting steady gains into the third quarter of 2015, when a drug pricing scandal put pressure on the industry. The sector ETF broke out once again in 2019, entering a shallower trajectory than the first half of the decade, and carved three highs into the January 2020 peak at $105.08.

The fund sold off to a three-year low during the pandemic decline and bounced into the second quarter, reaching the prior high in June. It broke out in July but stuck like glue to the prior high, in a support test that finally confirmed the breakout this week. Even so, price action remains under the rising highs trendline, limiting upside potential to about $113. Taken together with bearish volume divergences, exceptional returns are unlikely between now and year end.

Chart showing the share price performance of Humana Inc. (HUM)
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Humana Inc. (HUM) completed a round trip into the 2008 high at $88.10 in 2011, ahead of a 2014 breakout that stalled near $220 in the second quarter of 2015. the stock pulled back into the summer of 2016 and turned higher once again, reaching the prior high after the presidential election. A 2017 breakout eased immediately into a rising channel, posting a new high at $355.88 at the end of 2018.

The stock slumped badly in 2019, hitting a two-year low in April before bouncing in a recovery wave that finally reached the 2018 high in December. A January breakout failed in February, dropping to a three-year low, while the subsequent bounce completed a V-shaped pattern in April. A May breakout entered a shallow trajectory, just like the health care fund, with price action tagging trendline resistance on Wednesday. As a result, upside may be limited in coming weeks.

A V-shaped recovery is a type of economic recession and recovery that resembles a "V" shape in charting. Specifically, a V-shaped recovery represents the shape of a chart of economic measures economists create when examining recessions and recoveries. A V-shaped recovery involves a sharp rise back to a previous peak after a sharp decline in these metrics.

The Bottom Line

Health care, pharmaceutical, and biotech stocks posted strong rallies on Wednesday, with mixed election results lowering the odds for reform in the next presidential administration.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.