January was a bad month for the stock market. The S&P 500 declined by 5.3% and is coming off its worst month since March 2020 when the pandemic first started. Healthcare stocks fared even worse, with the Health Care Select Sector SPDR Fund (XLV -0.31%) declining by 6.9% in the first month of the year.
Should investors be worried, and is this a bad omen for the rest of 2022? Below, I'll look at the markets from a healthcare perspective to see what has historically taken place after a bad January and whether this could be a sign of some hard times ahead, or whether it just calls for an adjustment in strategy.
Image source: Getty Images.
A broad recovery may not be likely
In this first chart analyzing historical annual returns, I compare how the Health Care Select SPDR Fund has performed along with the top healthcare stock on the market -- UnitedHealth Group (UNH 0.23%). When we go back to 1999 (the Health Care Select's first full year), we can see how those two investments have performed both in terms of historical average returns (excluding dividends) and what those average returns have been in years when they fell by more than 2% in January:
Source: Google Finance. Table by author.
While the exchange-traded fund (ETF) has averaged a loss of more than 2% during years when it was off to a slow start, UnitedHealth's stock has managed to turn things around, and it has even averaged double-digit gains when it stumbled out of the gate. This past January, UnitedHealth's stock fell 5.9%, performing slightly better than the Health Care Select ETF.
Next up, we'll look at the individual years when these investments were off to slow starts to see if they can offer a bit more context behind these numbers.
The ETF hasn't typically performed well after a bad January
There have only been five years since 1999 when the Health Care Select ETF dipped more than 2% in the first month. And in the months that followed, there has normally been a mild recovery (at best). In 2020, despite a January when its value dipped 2.7%, the ETF had an incredibly strong year due to the pandemic, and that can distort the numbers. The same can be said for 2008's significant loss due to the financial crisis and 2000 when the dot-com bubble was bursting.
When excluding those years, however, we're still left with some underwhelming gains of less than 4% in 2016 and 8% in 2005 in the months after January.
Source: Google Finance. Table by author.
UnitedHealth is more likely to recover
A broad-based ETF like Health Care Select is less likely to see significant swings in its value. That's why these large single-month declines -- and a big recovery -- are rare.
UnitedHealth has not only had more years when it declined by at least 2% in the first month of the year, but it has also been more likely to rally in the months afterward:
Source: Google Finance. Table by author.
In both pandemic years of 2020 and 2021, the stock was off to a slow start but recovered in a big way, soaring by 50% last year from February through to the end of the year. And in the last four years when a 2% decline took place in the first month, the healthcare stock would go on to rally by at least 28% afterward. If you throw in the company's dividend (which isn't included in these figures), then those gains would be even stronger. Currently, UnitedHealth stock pays a dividend yield of 1.2%, which is slightly less than the S&P 500 average of 1.3%.
Does this mean you're better off investing in UnitedHealth than the Health Care Select ETF?
If the economy gets back to normal in 2022 and the pandemic is no longer weighing down hospitals, then both UnitedHealth and the broad Health Care Select ETF should perform well in the following months. Historically, UnitedHealth has outperformed the fund. Its five-year total returns (which include dividends) of 224% are more than double the 102% gains that the ETF has generated over the same period.
If you invest in the Health Care Select ETF, you're getting a mix of healthcare stocks rather than just one solid and stable buy like UnitedHealth. That means you're trading some stability (as displayed in the fund having fewer years when it had large declines in the first month of the year) in return for some potentially more impressive gains.
And while there may be some more volatility, with a stock like UnitedHealth, you're still not taking on significant risk. The healthcare company has a broad business that includes providing benefits, delivering healthcare, pharmacy services, and even analytics. It's coming off a year in 2021 when its sales of $287.6 billion rose 12% year over year, and cash flow from operations was an impressive $22.3 billion.
Unless you want the diversification with an ETF, you may be better off investing in the industry giant UnitedHealth, which has been delivering solid results for years and is more likely to outperform not just after a down month but over the long haul.
