The major U.S. stock indexes opened lower on Tuesday, following the market’s weakest trading session so far in 2018.
Health insurers, drug-makers, and distributors led the slide following the news that Amazon (NASDAQ: AMZN), JPMorgan Chase (NYSE: JPM), and Berkshire Hathaway (NYSE: BRK.A, BRK.B) have teamed up to launch their own health care venture.
The Dow slumped 306 points (1.2%) to 26,132, the S&P 500 fell 31 points (1.1%) to 2,821, and the Nasdaq dropped 82 points (1.1%) to 7,383.
The giant companies, which together employ over 1.1 million workers across the country, will launch an independent operation that’s intended to be free from profit-making incentives and just might set an illuminating example for the rest of the industry…
The New Venture
When you’re big enough and powerful enough, you don’t need to rely on existing private health care providers to handle your employee medical needs.
At least, that’s what Amazon, JPMorgan Chase, and Berkshire Hathaway have determined. And so, they’re working together to build their own fully independent employee health care company. This company will exclusively offer benefits and care to its own respective employees and their families.
By teaming up with JPMorgan — the biggest U.S. bank — and Warren Buffet’s Berkshire —the third largest public company in the world — Amazon appears to be taking a big step in shaking up the entire health care industry.
“The ballooning costs of health care act as a hungry tapeworm on the American economy,” said Buffet in the original press release.
The goal is to build a company with no motives other than to provide for the care and well-being of the workforce of the three companies and that will be “free from profit-making incentives and constraints.”
It’s described as a long-term plan. But those involved hope to ultimately avoid the kind of frustration that often comes with trying to secure needed care from third-party service providers, which are ultimately concerned with managing their own bottom lines.
At this stage, there’s not much to the theoretical company beyond the serious intent to create it that’s shared by all three partners.
It’s still in the “early planning” phase, per a press release announcing the news. But it has a kickoff temporary management team in place, which includes executives from each organization. It also has a plant for setting up longer-term management structures and an operating HQ in the near future.
The focus, for now, will be on figuring out how tech solutions could lower the costs of health care while still ensuring a better quality of services to the three companies’ U.S.-based employees and their families…
The Biggest Losers
This very well could be the stock markets’ weakest two-day performance in six months — representing a pause from the breakneck speed at which they’d been achieving all-time highs, back to back.
This news comes while investors in the health care sector are worrying that technology and retail behemoth Amazon could become a health care competitor and eat away at sector profits — like it has with retail.
Despite the news of the new tri-company health care venture, the drop in the markets comes during a week that’s packed with other key news for investors.
President Donald Trump delivered his first State of the Union on Tuesday, during which he addressed the effect of U.S. trade on the economy.
Federal Reserve Chair Janet Yellen presided over her final policy meeting on Tuesday and Wednesday.
And today, Friday, the jobs report is forecast to show that average hourly earnings have increased year over year — a sign of higher inflation — according to economists polled by Bloomberg.
The short but poignant press release delivered a whopping $69 billion blow to stocks all across the health care sector, driven in large part by the first word: Amazon.
The day long-feared by executives and investors alike in the $3.47 trillion U.S. health care sector had arrived — and with an unsettling lack of specificity.
Everyone is still terrified of Amazon.
For months, investors have fretted over a potential Amazon entry into health care delivery — particularly involving it selling prescription drugs — with stocks periodically being sold due to headlines anticipating a move by the massive online retailer.
Tuesday’s news was short on details, creating the potential for the uncertainty over Amazon’s health care goals to linger over the sector.
Among stocks in the drug supply chain, pharmacy benefit manager Express Scripts Holding Company was down 3.3% in midafternoon trading, drugstore chain CVS Health Corporation was down 4.1% percent, and pharmaceutical distributor McKesson Corporation was down 3%.
Health insurers, which have been relatively immune from previous Amazon-related jitters, were absolutely clobbered.
Cigna Corporation was down 7.2%, Anthem slumped 5.3%, and UnitedHealth Group declined 4.2% — making the whole thing the biggest single drag on the Dow so far this year.
Until Monday, health care stocks had risen 10.5% already this year, making it the best performing among all the major sectors and well ahead of the 6.7% rise for the overall S&P 500.
But Amazon’s announcement forced those gains to a staggering halt…
The Bottom Line
With more details of the new venture coming later, right now is all about setting direction and grabbing attention.
“The health care system is complex, and we enter into this challenge open-eyed about the degree of difficulty,” Bezos said in a statement. “Success is going to require talented experts, a beginner’s mind, and a long-term orientation.”
There’s still a lot to be sorted out beyond the broad goals, but this just might be the health care industry’s worst nightmare.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today