| The race to the White House has thrust US health care back on to the front burner. That makes sense, as its gravitas with voters over various elections has fluctuated widely. For investors, health reforms or proposals that ultimately affect financing, coverage, and delivery present useful insights that help determine where to place their money and how to balance risks ahead of a knife-edge election. Overall, health-care stocks, tracked by the S&P 500 Health Care index, are in pretty decent shape. The measure continues its upward trajectory, ignited mainly by the pandemic-induced vaccine demand. Although the index retreated from its all-time high in August, it's not too far off. This chart paints a rosy picture:  However, resisting the temptation of falling for this broad-stroke performance reveals a picture closest to the sector's reality — health care is arguably more of a stock-picker's market, with varying performance from different players. Blockbuster obesity drugs are by some distance the best breakthrough in pharmaceuticals since the Covid vaccines. The excitement over these drugs has contributed to massive outperformance by an index devoted only to weight-loss drugs. The Tema GLP-1 Obesity Cardiometabolic ETF, tracking products and services related to cardiovascular and metabolic diseases as defined by the Centers for Disease Control, was launched last November and until April was returning more money to investors than the Bloomberg Magnificent Seven.  Not all of these stocks are in the S&P 500. Comparing the relative performance of the S&P 500 health index to the S&P 500 excluding health stocks shows a depressing run. The measure has slumped dramatically after peaking at a nearly seven-year high late in 2022: Much of this may be because of political risks, which should be at least partially resolved one way or another in November. Troubles arising from policy changes for health insurance companies offering Medicare and Medicaid are common. Extensive regulatory scrutiny is another potential drawback. Do these risks make the sector unattractive? It depends. Jeff Muhlenkamp, portfolio manager at Muhlenkamp & Co., who holds the insurer UnitedHealth Group, argues that it's been worthwhile despite the risks: I don't think they're going away. They're doing decent things. They're not even overpriced. Even after four or five nice, steady uptick years, they have stepped down. They've taken two steps down in the last six months. Earnings were a little disappointing in terms of their future outlook and some other stuff. I don't think it's a big deal. I'm happy to hold them.
Perhaps the most significant political risk now is the Federal Trade Commission's scrutiny of mergers and acquisitions in the health sector, especially those involving pharmaceutical benefit managers. BMO Capital's Evan Seigerman believes these deals may likely be under the microscope given their contribution to health-care system issues. Last Friday, the FTC sued the three largest prescription drug benefit managers — Caremark Rx, Express Scripts, and OptumRx — for alleged anti-competitive and unfair practices that inflated the price of insulin drugs, blocked patients' access to more affordable products, and shifted the cost of high insulin list prices to vulnerable patients. Seigerman believes that increased scrutiny will be a regular feature: I don't know how much of a risk that is to the overall sector, but I think the biggest thing is the FTC and its impact on pharmaceutical mergers, whether it's real or just a chill and slowing down the pace of them because of policy.
 Injection pens at Novo Nordisk facilities in Hillerod, Denmark. Photographer: Carsten Snejbjerg/Bloomberg This feeds into the political stakes, as the FTC is far more likely to be given a free hand under a future president Kamala Harris than Donald Trump. Later Tuesday, Novo Nordisk's chief executive, Lars Fruergaard Jørgensen, will appear before a Senate committee led by Bernie Sanders for questions on whether the blockbuster diabetes and weight-loss drug Ozempic should fall under the scope of government price controls. While this is sure to generate interest given the high price and limited availability of these drugs, Seigerman does not see any material risk other than a "nice headline" ahead of the election. Risks to President Joe Biden's Inflation Reduction Act, which requires the government to negotiate the prices of certain drugs in Medicare, have been largely contained, even though Trump's approach to such pharmaceutical bargaining is unclear. Whoever wins, Seigerman suggests that markets are pricing these risks, although they're convinced not much would change in the next couple of years. —Richard Abbey Last Friday's Points of Return reveals that there's plenty of interest in the concept of R* or R-star, the level of real interest rates at which monetary policy is neither restrictive nor stimulative. The fact that it cannot be known in real time doesn't stop people from trying to put a number on it, and estimates are drifting gently upward. If the all-important economists who have votes on central bank monetary policy committees agree, that would in turn imply that policy rates aren't going to fall as much as many now expect. So, with thanks for the feedback to last week's article, let's return to the issue of the neutral rate. One point is that the anonymized estimates given for "long-term" fed funds rates — a sensible proxy for the neutral rate — by Federal Open Market Committee members in their quarterly survey of economic projections show that the doves are changing their mind. A year ago, 11 committee members, an easy majority, believed the long-term rate would be between 2.26% and 2.5%. Now, only four think it will be that low. Tracking those voting for each possible long-term rate over the five surveys in the last year shows a clear upward drift; it also reveals that a fairly strong consensus has been replaced by a wide spread of views. More members are now open to the idea of a rising R*, and that increases the chance that the current easing campaign will end much earlier than pricing now implies:  This is at least in part a response to the way very high interest rates haven't restricted growth as much as expected. Jennifer McKeown, chief global economist at Capital Economics, published research last year that neutral rates were rising, and says that "nothing has changed to fundamentally alter our view that R* has risen in recent years and will increase further." The most important new evidence, she suggests, is that high interest rates still haven't provoked recessions in the major developing economies: "Indeed, those that were struggling the most (the UK and eurozone) returned to growth in the first half of the year with interest rates still at or near their peaks." This implies that the neutral rate is higher than thought, and hence that current interest rates are less restrictive than thought. McKeown predicts a further rise in equilibrium rates over the next decade, particularly in Japan from a low base. This is largely because growing retired populations will tend to spend their savings — thus pressing down on demand for bonds and raising their yield: The share of advanced economy populations aged over 65 is set to rise rapidly. This is likely to reduce desired aggregate savings and hence boost equilibrium interest rates as more people retire. It is possible, though, that this impact will be partly offset by those of working age saving more as concerns about the sustainability of state pension systems grow.
As it stands, however, she expects equilibrium rates to rise as populations age further: For most countries, the combined impact of aging with the outstanding supply of debt will tend to bring neutral rates lower compared to the US, with the one big exception being the relatively young nation of India. This chart shows how Oxford Economics projects R* to move in other countries relative to the US between now and 2030: R*s are already diverging, particularly in the critical gap between the US and eurozone. In the latter, a steadily growing excess of savings has combined with poor productivity to push the neutral rate into negative territory (this is a real number, after inflation, so it still suggests that nominal rates should be positive). Societe Generale SA's Kit Juckes illustrates the emerging gap between the two according to one of the most widely followed models from the New York Fed: This has important consequences for the foreign exchange market, as it suggests US yields will stay significantly higher than in the eurozone, and thus that support is in the offing for the dollar. "As long as R* in Europe and Asia is (much) lower than in the US, capital will be drawn to the dollar," says Juckes. "That means either that US rates will be dragged down towards the global average, or that dollar weakness can't last indefinitely." It also means that it's harder to tell which economies are being most restrictive and most lenient. Daniel Harenberg, Oxford Economics' lead global economist, shows here how neutral and actual rates have varied in the major economies. The key is the gap between them. On these estimates, Japan has had by far the tightest monetary policy in the world for most of this century. Even if all of them manage to reach neutral by the end of this decade, they will do so at different final levels, with US rates higher than everyone else: Policymakers must hence contend with the possibility that the cost of servicing public debt is going to rise. In the UK, the House of Lords has issued its own report into debt sustainability, a growing issue as the new Labour government tells the people that public finances are in a parlous state. There are implications for investors, too. At present, fed funds futures are discounting a 2.93% fed funds rate at the beginning of 2027. As they also project that fed funds will have been stable at that rate for a while, it's fair to infer that traders think this is the neutral rate. At present, 12 FOMC members agree that the rate will stabilize below 3%, while seven don't. It doesn't take too many doves to capitulate to start pushing long-term interest rates upward. Continuing on the subject of stars, there are lots of songs about them. The latest constellation includes: Lucky Star by Superfunk, White Star Liner by Public Service Broadcasting, Telstar by The Tornadoes (number one in England when the Beatles' "Love Me Do" first entered the charts), Might Be Stars by The Wannadies, "Tell Me It's Not Over" by Starsailor, Evening Star by Judas Priest, Seeing Stars by Gin Blossoms, Blackstar by David Bowie, Stars on 45, Starcrazy by Suede, Rock and Roll Star by Oasis, Baby I'm a Star by Prince, The Northern Lights by Renaissance, "Everything Turns Around" by Dogstar (featuring Keanu Reeves), Whitestar by Fabrik, anything from Thank Your Lucky Stars by the Smiths, Starlight (Taylor's Version) by Taylor Swift, and Venus and Mars by Paul McCartney and Wings. There are a lot of these and I've discovered some interesting ones along the way. Any more? Like Bloomberg's Points of Return? Subscribe for unlimited access to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close.
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