Short-Term Market Volatility Could Provide Long-Term Investing Opportunities

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. A weak start in 2024 isn’t dimming Morningstar’s outlook for Apple’s stock. Why Morningstar thinks Apple could turn it around for 2025. Plus, the Federal Reserve is delaying interest-rate cuts while inflation runs hot. Morningstar Inc. markets reporter Sarah Hansen has investigated how short-term volatility could be a long-term opportunity for investors. And Retirement Reboot author Mark Miller is here to spread the word about some Medicare changes in 2024. Find out where you can save some money. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Apple Has a Weak Start to 2024, but There’s Optimism for 2025

Apple AAPL has had a weak start to 2024, but Morningstar is optimistic for 2025. The tech giant’s March-quarter revenue was aligned with Morningstar’s forecast, declining to just over $90 billion. Apple’s June-quarter outlook fell below Morningstar’s positive expectations. IPhone revenue is Apple’s primary driver; it decreased this quarter. Morningstar anticipates improvements in iPhone revenue growth by next year but thinks Apple will still face challenges with more domestic competition in China and slowing iPhone refresh cycles globally. Apple’s services continue to have strong revenue growth. A lack of updates about generative artificial intelligence has weighed on Apple’s share performance this year. Morningstar expects Apple to make gen AI product announcements over the summer and expects those to drive improved iPhone revenue growth next year. Morningstar is raising what it thinks Apple stock is worth to $170 per share from $160 per share. Shares look fairly valued.

Amazon’s First Quarter Is Impressive

Impressive first-quarter results lifted Morningstar’s estimate of the value of Amazon’s stock. Amazon AMZN netted a best-ever operating profit of $15.3 billion. Morningstar believes there’s room for more. Overall demand continues to trend up across Amazon’s businesses. Most of the growth comes from online stores, advertising, and Amazon Web Services. Amazon has expanded its selection and improved delivery speed on the retail side, but increased delivery speed does not mean higher costs. Meanwhile, artificial intelligence has contributed to the growth of Amazon Web Services. Morningstar believes Amazon stands to gain from generative AI adoption. Amazon management says generative AI can add tens of billions of dollars to revenue over the next several years. Morningstar thinks the online retail giant is worth $193 per share, up from $185. The stock appears fairly valued.

Eli Lilly Performs Better Than Expected in Q1

Eli Lilly LLY had a better-than-expected first quarter. The pharmaceutical company’s pricing is the main driver of its top-line margin growth. Specifically, Morningstar thinks the pricing power of diabetes drug Mounjaro supported much of the pricing gains. This solidifies Eli Lilly’s competitive advantage in Morningstar’s eyes, though the gains should decelerate later in the year. Sales of GLP-1 and related drugs remain the key to Eli Lilly’s growth. Morningstar expects sales to top $60 billion given the strong efficacy of Mounjaro and the weight-loss drug Zepbound. High demand, supply constraints, and a lack of significant competition, besides Novo Nordisk NVO, give the company pricing power. These factors are driving sales and margins higher. Eli Lilly’s breast cancer drug Verzenio also grew and gained traction. But the analyst expects that to slow later this year. Morningstar is raising its estimate for what Eli Lilly’s stock is worth to $540 from $500. Shares look overvalued.

Medicare’s Falling Prescription Costs

Your prescription costs are likely falling if you’re on Medicare. Have you noticed yet? Mark Miller has written about this and calls it “the best news that few people seem to know about.” He is here to spread the word, and hopefully, you will too after this interview. Mark is the author of Retirement Reboot and a Morningstar contributor.

Thanks for joining me, Mark.

Mark Miller: Hi, Ivanna. Thanks for inviting me.

Why Are Medicare Prescription Costs Dropping?

Hampton: Why are many seniors on Medicare seeing prices drop at the pharmacy counter?

Miller: This is a result of changes that were included in the Inflation Reduction Act that was passed a couple of years ago. It’s a law that’s mostly about climate change and clean energy, but it contains some really significant changes to the Part D Medicare prescription drug program that many seniors are enrolled in. These changes aim to address a particular problem with Part D, which is that it didn’t do a very good job protecting people who encountered really high drug costs. People who were taking kind of new class of, say, biologic drugs for conditions like cancer or expensive blood-thinning medications. They weren’t really on the market so much when Part D came into existence in 2006, but this has since been a big thing.

So, without getting too far under the hood here, the Part D program had some components to the way it was designed that once you hit a certain amount of spending, you could be on the hook for thousands and thousands of dollars above and beyond what you were spending on premiums.

So, there are a number of changes in this law that aim to address that problem, and some of the changes kicked in actually last year. One that is important for people with diabetes is that the cost of insulin was capped at $35 a month, and also all Part D-qualified vaccines were made free. This year, a new cap on out-of-pocket costs kicked in, and it amounts to a cap of about $3,300 a year. Again, for people who start spending lots of money on expensive brand-name drugs for specific conditions. Another thing that kicked in this year that’s a little harder to see but is working behind the scenes is that this law penalizes the drug companies if they increase their prices more than the rate of general inflation. Another thing that began this year was expanded eligibility for financial assistance for low-income seniors to get more help with their premiums and costs.

A lot of people have also read about or heard about the new drug price negotiations that are going on between Medicare and the pharmaceutical companies. Those are now underway, and they’re negotiating over the cost of 10 expensive drugs, and we’ll have to see where that comes out. One of the changes that’s coming next year that I’m actually the most excited about is we’ll have that cap on out-of-pocket costs that I mentioned. That’s $3,300 this year; next year that falls further to $2,000. So, the most you pay out of pocket for Part D next year will be $2,000, which is really an outstanding change. Another change that kicks in next year for people who do encounter those higher costs is that the drug plans will be required to offer you an option where you could spread those costs out over the year in monthly payments, which will help people who maybe have lower incomes and maybe some cash flow challenges.

There are really some great changes. And the interesting thing is that awareness of these changes is really just starting to kick in. I was asking one healthcare expert about this for the story that I wrote for The New York Times. She said, “Well, it’s not that surprising because most of us really kind of have no idea what we’re paying for healthcare and can’t figure out why anyway.” So, the fact that a specific change like this would be taking place unless you happen to have read about the law, it’s not that surprising that lots of people just don’t know about it yet.

How Spending Caps Affect Seniors

Hampton: Can you describe what the spending caps mean for seniors and their finances?

Miller: You pay your premium for the policy. That might be, let’s say, $30 a month, but then you get to certain features of these drug plans where you have to pay more and more out of pocket above the premium. So, like I say, it would be an issue for people who are taking very expensive drugs and, in some cases, might be paying $10,000 or more out of pocket for their drug needs. I interviewed a couple of people for the story who were facing that. Now, there’s more of a ceiling on that cost. One person I interviewed for the article is battling cancer and has been on expensive, sophisticated, lifesaving drugs now for a decade. So, the good news is these drugs are lifesavers. But he spent out of pocket last year $16,000. And this year he paid his bills in January, which were about $3,300, and now he’s pretty much done for the year with the exception of just paying his premium. So, it’s a really profound change that’s going to affect probably about 1.5 million or maybe perhaps 2.0 million people in that program this year.

Expanded Access to Federal Assistance for Low-Income Seniors

Hampton: And you mentioned the expanded access to federal assistance for low-income seniors. Can you give a few more details about that?

Miller: There’s a federal program called Extra Help, which is for people who qualify, and the qualification tests have to do with your income and also assets you might have, savings. If those are low enough, this program will pick up part or all of your premiums and other out-of-pocket costs. So, it’s an important program. It’s actually underenrolled, meaning there are more people who could be getting it than are enrolled. And it’s just a matter of not knowing about it or not knowing how to apply, that sort of thing.

Hampton: Well, Mark, thanks for coming on a podcast to spread the word.

Miller: My pleasure. Thank you.

Will Interest Rates Stay Higher for Longer?

Hampton: Interest rates will likely stay higher for longer as inflation continues to run hot. The Fed’s preferred inflation tracker came in stronger than expected for March. Wall Street is waiting to see what the upcoming Consumer Price Index report is signaling about the economy. The short-term volatility could provide a long-term opportunity for investors. Morningstar Inc.’s markets reporter Sarah Hansen has written about this.

Thanks for joining me, Sarah.

Sarah Hansen: Thanks so much for having me.

How Have Interest Rates Weighed on Stocks?

Hampton: The year started with the market predicting several interest-rate cuts. Those numbers have dwindled. What’s been the impact on stocks?

Hansen: That rate repricing that you’re describing has been the biggest story for markets this year. Investors started 2024 anticipating six or even seven cuts from the Fed over the course of the year. The central bank had brought those rates very high to bring down inflation. And at the end of 2023, it looked like they were really making great progress. What changed between then and now is inflation. Price pressures have stayed unexpectedly elevated in the first few months of the year. We’ve had a couple of surprising inflation reports in a row. As a result, it’s looking like we maybe see only one or two cuts in 2024, if we see them this year at all.

And the stock market does not like that. The market has stumbled over the past couple of weeks as investors digest that data. At a very high level, high interest rates tend to weigh on stocks because they make it more expensive to borrow money. They take a bite out of balance sheets, and they take a bite out of profits. And that makes investors nervous. Rates seem to have peaked over the summer. They’ve been high and steady for a long time. And investors have been steadily waiting ever since then for them to come down again. And growing evidence that that process might take longer than we thought is what’s causing this dip in markets right now.

How Fewer Interest-Rate Cuts Could Benefit Investors

Hampton: How could fewer rate cuts benefit investors?

Hansen: The good news is that analysts say not to worry too much about short-term volatility. It does not mean that the bull market is over. Earnings are still coming in strong. The economy is still growing. The labor market is still robust, and consumers are still spending plenty of money. And a market reset may actually be a positive thing given valuations. Valuations have been somewhat elevated across the board compared to a year ago. Strategists are saying that a pause in this bull run may give markets a little bit of time to digest, may let valuations kind of come back down to healthier levels for investors.

Hampton: What’s the prediction for the bond market, and what should fixed-income investors consider?

Hansen: When it comes to bonds, higher rates generally mean higher yields for investors. That’s the coupon portion of the bond. It’s the income part of fixed income. So, that’s good for investors. On the other hand, it does mean that bond investors could see less price appreciation for their bond holdings. But that’s the kind of negative correlation of price and yields for bonds. But in an environment where stocks are doing well analysts are confident that bonds can act as a portfolio diversifier again, which would be different from 2022 and a positive thing. If some shock were to set stocks falling, it’s a decent bet that bond prices would rise and help cushion a portfolio again, even if yields were to fall.

Key Takeaway

Hampton: And what’s the key takeaway for investors?

Hansen: As is always the case, it’s never a good idea to let short-term fluctuations in markets derail a long-term strategy. Volatility is a very normal part of investing in markets, in any market, and it’s really important to make sure that your portfolio is constructed in a way such that you can withstand it and you can withstand it at a level that you’re comfortable with. But for those investors with cash sitting on the sidelines, strategists are saying that a short-term pullback like the one we’re experiencing now could be a buying opportunity in both stock and bond markets if you have the cash to put to work.

Hampton: Well, Sarah, thank you for your time today.

Hansen: Thanks so much for having me.

Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to senior video producer Jake VanKersen, lead technical producer Scott Halver, associate multimedia editor Jessica Bebel, and editor Margaret Giles. And thank you for watching Investing Insights. We appreciate it. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.