Biotechs Fearing An Election Sweep, Erroneously Turn Tail

Summary

  • Sharp decline in Biotech Stocks last week was a reaction to political winds.
  • Biotechs fear an election sweep giving control of Congress and White House to a single-party.
  • We believe control of Congress will be retained by incumbent party or at worst split evenly.
  • Overreaction to a low probability outcome creates a buying opportunity.

Biotech sector had a tumultuous last week. The sector suffered steep decline, as represented by Biotech ETFs (IBB) and (XBI), of over -6%. The decline was experienced across the board by both large-cap and mid-cap companies like Gilead (GILD), Biomarin (BMRN), Amgen (AMGN), Biogen (BIIB), Vertex (VRTX), and Bluebird (BLUE). The overall market indexes also pulled-back last week, but relatively mildly, with the S&P 500 (SPY) down -1%, Nasdaq (QQQ) down -1.5%, and the small-cap Russell 2000 (IWM) down -2%. The IBB also cut through the key 200 day moving average support area.

Reassessing political outcomes, weak earnings start, and quite likely automated selling, contributed to the sharp slide in the Biotech sector.

Politics Once Again Knocks the Wind Out of Healthcare

Political winds have buffeted the biotech sector before with adverse consequences, and this time was no different. It appears the potential for a US election sweep, which can give control of the White House and both chambers of Congress to a single party, Democratic, has unnerved investors and was the primary reason for the sharp decline. Early earnings reports that were released last week also contributed to the slide.

The shift in investor sentiment has occurred on the backs of polling gains accrued by the Democratic candidate, primarily as a result of growing negative reports about the Republican opponent. While the market has expected a Democratic Presidential victory, the surprise has been the growing divergence between the polling numbers for each candidate. This is raising the possibility, once thought highly improbable, of a potential Democratic sweep of both the Senate and the House of Representatives.

The healthcare sector will prefer a split of power between the White House and Congress or a divided Congress. This will ensure a policy status quo or at least limit the extent of any

This article was written by

Tarun Chandra, CFA profile picture
4.71K Followers
A healthcare growth portfolio with a record of consistently strong returns

I have worked as an Analyst on both the Buy (Asset Management) and Sell (Investment Brokerage) sides, as well as in Strategy and Finance roles for technology services companies. For many years, I have been publishing risk-adjusted, return-driven quantitative model portfolios.


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