The Dow Is Falling Wednesday for Just 1 Reason

Wall Street has been in bull market mode for the past few weeks, and for the broader market, Wednesday morning was no exception. Both the S&P 500 and Nasdaq Composite were flat at the open on Wednesday as investors remained optimistic that the Federal Reserve won’t do too much more to clamp down on the economy in its efforts to tame inflation.

Yet the Dow Jones Industrial Average (^DJI -0.26%) wasn’t as fortunate, as it opened lower on the day. The big culprit: UnitedHealth Group (UNH -7.17%), which plunged 8% and cost the average hundreds of points. Below, you’ll learn more about what happened to health insurance stocks more generally, and why there could be more pain ahead for the industry.

A massive hit from UnitedHealth

UnitedHealth isn’t close to being the Dow Jones Industrial Average’s most valuable component in terms of market capitalization, weighing in Tuesday at around $450 billion. However, its stock price approached $500 per share as of Tuesday’s close, and that was enough to give it by far the most influence over the price-weighted Dow. UnitedHealth’s weighting within the Dow amounts to 9.5%, nearly triple what it would be in an equal-weighted index of all 30 index components.

As a result, its $40 per share drop at the open worked out to between 275 and 300 points of downward pressure on the Dow. With the index down by about 200 points, its entire drop was attributable to UnitedHealth’s woes.

So what’s hurting the health insurance industry?

The catalyst for UnitedHealth’s downward move was a presentation at a healthcare industry conference late on Tuesday. A top UnitedHealth executive was part of a panel of industry leaders talking about the state of the industry, and he pointed to changing behavior among older patients that could prove costly to the health insurer.

Many Americans chose to delay elective procedures or were unable to schedule them during the early years of the COVID-19 pandemic. The resulting drop in volume of these elective procedures was beneficial to UnitedHealth’s bottom line because it meant that patients weren’t demanding the same level of medical care as they had previously. Even after factoring in the specific costs associated with COVID-19 itself, the offsetting decline in procedures was beneficial to the insurer’s earnings.

Now, though, patients are finally moving to get those postponed elective procedures done. Most medical professionals and facilities have returned to offering their full suites of services, making it easier for patients to find someone to work with them. As a result, UnitedHealth anticipates that medical cost ratios could go up, eating into its profit growth.

Investors felt the impact of that commentary far beyond UnitedHealth’s shares. Other health insurance stocks also took big hits. Humana‘s (HUM -13.55%) drop was the most significant — it was down 13% early Wednesday morning. Shares of Centene (CNC -8.29%), Elevance Health (ELV -7.03%), and CVS Health (CVS -6.25%) were all down by between 5% and 8%.

A turning of the tide?

UnitedHealth has been a stalwart of the Dow for years, and has outperformed the blue chip index over the past decade. Its embrace of wellness initiatives and healthcare services has complemented its core insurance business well, and it has paid a modest but growing dividend to its shareholders.

As high-growth investors turn their attention to artificial intelligence and other hot themes, defensive investments like healthcare stocks might fall out of favor. If that turns out to be the case, it could mean that this latest move lower for UnitedHealth might be longer-lived than just a few days.

Dan Caplinger has positions in UnitedHealth Group. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.