At the end of the day, whether or not Republicans succeed in "repealing and replacing" Obamacare doesn't really matter. While it could certainly add to the existing carnage, the outlook for healthcare stocks remains unequivocally bearish.
A key barometer of the industry's growth prospects is Healthcare jobs growth. As evidenced by last week's jobs report, it continues to slow. This is as foreboding a sign as any for future stock performance in the sector.
As I said in November, a 'Day of Reckoning Is Coming' for Healthcare. Here's the backstory.
The Affordable Care Act created legions of newly-minted U.S. medical consumers where none existed before. According to Hedgeye Healthcare policy analyst Emily Evans' back-of-the-envelope calculation, roughly 10 million people were added to the healthcare system as a direct result of Obamacare. That obviously benefited the bottom line of the Healthcare companies that cared for them, their executives, as well as investors who enjoyed incredible stock returns.
Until it didn't.
Last year, the Healthcare sector (XLV) underperformed the S&P 500 by a wide margin. It was down -4.3% versus +9.5% respectively.
Here's why.
In 2016, we entered a period we called the #ACATaper. That's when the benefits of millions of new U.S. medical consumers (and the money to pay for their healthcare) began to taper off back to slow to negative growth. The industry then resumes grappling with the litany of cost pressures that existed before Obamacare, and will certainly exist after it. In short, the ACA created a year-over-year comparison so enormous that healthcare stocks have begun to unwind rather violently.
In other words, healthcare jobs are essentially a proxy for this massive pull forward of demand. That's why tracking the U.S. labor market is so critical. And jobs growth has been slowing.
Healthcare employment growth for December 2016 was +2.8% year-over-year, down from its peak of +3.4% YoY in March of 2016 and a slight uptick from +2.7% in November 2016. Overall Healthcare employment trends continue to slow year-over-year, which is in-line with our negative view of medical consumption.
Meanwhile, Hospital Employment growth of +2.8% YoY in December is the slowest since June of 2015, and down from its peak of +3.9% YoY in April 2016. We believe hospital employment will continue slowing reflecting deteriorating admissions trends.
Biotech employment growth of +7.0% in November was up sequentially, but down from its peak of +7.5% in August of 2016. Offices of physicians employment of +3.0% in December was up sequentially, but down from its peak of +3.6% in October of 2015.
All of this supports our short thesis on companies like AMN Healthcare Services (AMN), HCA Holdings (HCA), and the Healthcare Sector more broadly, as we continue to see further downside to growth. The upcoming #ACA2.0 policy changes under Repeal & Replace, and Tax Reform to a lesser extent, are largely negative for medical spending and providers specifically.
