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TheStreet Open House

Health Care Stocks Steam Ahead Even as Sector Growth Slips

NEW YORK ( TheStreet) -- Health care stocks are leading the S&P 500 this year despite slower growth in the sector, suggesting gains could be even more impressive if the trend reverses.

Despite a popular perception health care spending continues to rise inexorably, it has actually been on a downward trend since 2002 or 2009, depending upon which health care economist you choose to follow. The recent slowdown stands in contrast to growth that has consistently eclipsed gross domestic product, with few interruptions, since at least the mid-1960s.

Whether the slowdown in health care spending growth will continue, however, is up for debate, with "responsible people on both sides," said Brookings Fellow Henry Aaron.

Though Aaron is in the camp that believes the slowdown will endure, he nonetheless argued that the underlying fundamentals are good for the health care sector, which is why he conceded that he has "a significant fraction" of his savings in health care mutual funds.

These fundamentals boil down to three main points, according to Aaron.

First, research has shown that as people grow wealthier they want more and better health care.

"You can draw that inference from comparisons across countries at different income levels and in individual countries over time. And if you just look at the effect of income all by itself it looks like we want health care spending to grow at least as fast as incomes do," Aaron said.

Second, he said, "You consume more of it as you get older and on average populations are getting older -- they're going to keep on doing that for a long time."

The final point, according to Aaron, is most important and most difficult to forecast. It's all the exciting new innovations that come out of the medical field, aided by funds from governments and foundations.

"I got asked three or four years ago to serve on the visiting committee for the Harvard Medical School and boy oh boy is that ever eye-popping. You spend the time hearing about what's going on. Admittedly Harvard's special, but it's not unique. We're going to have things that we're going to want, and that's going to tend to push up health care spending," Aaron said.

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