US extends debt ceiling, what this could mean for health stocks

Emeh Joy
By Emeh Joy

Basic medical scientist, health research writer with experience writing for health brands like Dentistry Brands LLC and KompleteCare.

Healthcare services and health stocks may be affected as the US extends debt ceiling

In August 2021, the United States Congress started debates over extending the nation’s debt limit (also called debt ceiling) to avoid a debt default. This has elicited a call for lawmakers to reduce government spending while seeking ways to repay debts.

The fact that the U.S. is on the verge of hitting its debt limit can affect various economic markets and sectors, including health.  

The US debt ceiling

The U.S. debt ceiling is the maximum amount of money the United States is allowed to borrow to meet its financial obligations. 

The U.S. runs a budget deficit. This means that the nation spends more than its income and has to borrow an enormous deal of money to foot its bills. 

The U.S. Treasury had estimated that it would run out of money to pay off the nation’s bill on 18th October 2021 if the debt ceiling was not increased. 

After a series of arguments about this, the U.S. Senate approved that the debt ceiling, pegged at $480billion, be extended to $28.9 trillion.

On 14th October 2021, President Joe Biden signed the debt ceiling extension into legislation. However, this move by the United States government is only temporary as it pushes off the deadline for U.S. debt default only till 3rd December 2021.

This wouldn’t be the first time the U.S. is extending its debt limit, and indeed the country has approached its debt limit up to 17 times since 2001.2 The aim of extending the debt ceiling is to avert a debt default. A debt default is the failure of a government to repay its country’s debts.

What would happen if the US hits its debt limit

If the U.S. debt ceiling was not raised and the country hit the debt limit, it could cause self-inflicted financial crises and economic recession. 

If the government did not extend the debt ceiling, the U.S. would have hit its debt limit and what this means is that a debt default occurs. This has never happened in the history of America.

A debt default makes it even harder for a country to borrow. It is similar to maxing out a credit card.

If potential lenders suspect that a government may be unable to pay back its debt, they might demand higher interest rates to compensate for the risk of default. This means the country’s credit rating suffers.

Interest is the money a lender earns when a borrower repays a loan. Every loan has a risk. The risk is that the borrower might not repay the loan. To compensate for that risk, borrowers are rewarded with ‘an interest’. 

A low interest rate encourages borrowing. It also leaves consumers with more money to spend and invest. It encourages businesses to borrow money to buy large company equipment thus, increasing output and productivity.5

On the other hand, a high interest rate discourages borrowing. It also makes consumers cut back on spending and investment since they have less disposable income. 

Perhaps the biggest concern about the U.S. hitting its debt limit is its widespread impact on the economy. The United States has many student loans, car loans and mortgages pegged to the U.S. Treasury rates. 

Imagine what would happen if the interest rates drastically increased and borrowers were to pay higher because of a debt default. The result would be that citizens would have less money at their disposal to spend on goods and services, therefore leading to a recession. 

The US health sector might be affected

Photo by CDC on Unsplash

If the United States hits its debt limit, it will run out of cash at hand. It will be unable to pay for its numerous daily obligations, including salaries of federal employees, social security and utility bills. 

A perceived threat of debt default can trigger a cascade of negative economic situations that can directly or indirectly affect the health sector. 

Healthcare spending in the U.S. has increased at a faster rate than gross domestic product since the late 1990s. In 2013, the total national spending on healthcare costs increased to $1.67 trillion or $5,670 per person.4

Rapid and increased spending on healthcare significantly impacts the federal budget. It is also considered to lower economic growth and overall employment.3

With the recent economic outlook, high scrutiny may be placed on healthcare spending. This means the government may start cutting expenses, and companies reduce wages or halt wage increases while reducing health insurance benefits.

What the US health investment market looks like in 2021

According to the BlackRock healthcare sector outlook, the healthcare sector showed much resilience and posted strong returns beginning of 2021 compared to some other sectors.1

According to a report from Silicon Valley Bank, healthcare investment hit $47b in the first half of 2021.6 The COVID-19 pandemic affected every sector of the economy, but it also changed the face of healthcare as we know it.

The healthcare industry experienced an elevation in its economic activities. This acceleration in health economic activity could be seen in venture fundraising and increased private investments in healthtech and biopharma. 

The first half of 2021 also saw a surge in Series A investments for biopharma. The Platform Series A investment shot past the 2020 investment. Capital invested in the first half of 2021 already exceeded what was invested full-year 2020 by 27%.

This shows that investors have been keener to invest in healthcare in 2021. It is noteworthy to add that the healthcare sector is wide as it includes different companies ranging from healthcare and pharma services to medical equipment and biotech. 

Most healthcare sector analysis shows that some companies within these sub-sectors are doing well during the pandemic, e.g. virtual health providers and immunisation/vaccination sub-sectors.

Pfizer is one example of a U.S. healthcare company that fared well due to the pandemic. As of March 2020, Pfizer stock price was about $28.50; however, following the rollout of its COVID-19  vaccine, which proved to be about 90% effective, its share price went up, reaching as high as $43.46 as of September-ending. 

Medtronic is an American-Irish registered company that manufactures medical devices such as portable ventilators. This company has seen its share price move from $77.46 in March 2020 to $129.7 in September 2021

The US debt ceiling situation may affect the US health stocks

Photo by Firmbee.com on Unsplash

The healthcare sector is a great place to look for investment opportunities.

Some of the best U.S. healthcare stocks and ETFs to look out for include Pfizer, Johnson & Johnson, Cardinal Health Inc, Vanguard Health Care ETF and iShares U.S. Health Care Providers ETF. These companies are booming and have the potentials of outgrowing their present status. 

However, with the U.S. economy going through financial uncertainty, what will the market look like for these stocks? Will health stocks be affected if an upheaval hits the U.S. economy? 

The fact is that investors are sceptical about investing in a government that is on the verge of going into a debt default. This is because debt default typically triggers a spike in interest rates. And the federal funds rate also determine how investors will invest their money. 

An increase in interest rates can affect health stocks causing their prices to fall. According to the financial services firm Moody's Analytics, a spike in interest rates can cause stock prices to be reduced by almost a third, wiping out nearly $15 trillion in household wealth.7

The Moody Analytic report showed that the last time the U.S. was on the verge of hitting the debt limit in 2013, investor concerns over a U.S. government default caused short term interest rates to shoot up. Even though the government did not end up defaulting, and interest rates declined fast, that period saw taxpayers incur nearly half-billion dollars due to the added interest costs. 

The present heightened economic uncertainty would most likely affect stock investment. It will also weigh heavily on GDP growth. 

The next likely move will be for global health investors to sell their securities or stop buying. Also, since higher interest rates mean less cash at hand for Americans, there will be little or less money available to invest in these stocks. 

The estimated amount of cash flows for a company will drop if it is perceived that the company is less profitable or cutting back on its growth. All things being equal, the company's stock price will reduce. If many companies experience such a decline in their stock prices, the whole market will go down.

The stock market and the state of the economy are interlinked; they influence each other. If the interest rates go up as a result of the government's financial situation, there are high chances that health stock prices will tumble. 

Saying that U.S. health stocks may be affected is only speculation. However, the general rule of thumb is the higher the interest rate, the lower stock prices go and the lower the interest rate, the higher stock prices go.

Hopefully, the U.S. stock market will not go down at this point since the U.S. government hasn't made a debt default.

References

  1. BlackRock. (2021, February 19). BlackRock Sector Outlook 2021: Healthcare. https://www.blackrock.com/institutions/en-us/insights/investment-actions/healthcare-outlook
  2. Congressional Research Service. (2021, March 17). The Debt Limit. https://sgp.fas.org/crs/misc/IF10292.pdf 
  3. Monaco, R. M., and Phelps, J. H. (1995). Health care prices, the federal budget, and economic growth. Health affairs (Project Hope), 14(2), 248–259. https://doi.org/10.1377/hlthaff.14.2.248
  4. Office of the Assistant Secretary for Planning and Evaluation (ASPE). (2005, February 21). Effects of Health Care Spending on the U.S. Economy. https://aspe.hhs.gov/reports/effects-health-care-spending-us-economy-0
  5. Seabury, Chris. (2021, May 28). "How Interest Rates Affect the U.S. Markets." Investopedia. https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp
  6. Silicon Valley Bank. (n.d.) Healthcare Investment Dollars in 1H 2021 hit $47B. https://www.svb.com/trends-insights/reports/healthcare-investments-and-exits/2021-midyear
  7. Zandi, Mark and Yaros, Bernard. (2021, September 21). "Playing a Dangerous Game WIth the Debt Limit." Moody's Analytics. https://www.moodysanalytics.com/-/media/article/2021/playing-a-dangerous-game-with-the-debt-limit.pdf 

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