It has been a wild week in the stock market.
The human part of markets, the traders and big investors who make things move, are confused. They want to feel hope, but the immediate outlook is still bleak. They don’t seem to really believe that Jay Powell’s new-found hawkishness is any more a permanent state than the dovishness that preceded it. He is, as he keeps telling us, data dependent, so traders are looking forward to a time in the not-too-distant future when his and the FOMC’s flip turns into a flop. That is why we saw such a strong rally when the Bank of England caved to market pressure and temporarily reversed course this week. For now, though, the data remain pretty uniformly depressing.
Still, there are some individual investors who sold some things on the way down and feel that a break of the June lows in the major indices is a good time to start nibbling at stocks again, or maybe they have a long-term dollar cost averaging strategy that they have stuck with. Whatever the reason, there are a lot of people with cash to deploy, and the numbers clearly indicate that this time around, they aren’t afraid to buy the dip. The question that faces them, of course, is what to buy in a falling market.
Some will simply buy index tracking funds. Others will buy the hardest hit names, growth-oriented companies that were all the rage a few months ago like Robinhood (HOOD), say, or Coinbase (COIN). Others still will be looking for stocks that have shown some resistance to bear markets, but can still benefit when sentiment turns. In the last category, some of the best options are in healthcare, a traditionally defensive sector for stock investors that has, over the last decade or so, introduced a massive growth element to calculations about its value.
I know, the industry often feels like it is under siege. Politicians of all stripes love to bash pharma companies and talk about healthcare reform, whether that is strengthening or dismantling Obamacare, limiting or expanding Medicare and Medicaid, or whatever else fits their agenda and that they think people want to hear. That has led some to conclude that the future of healthcare is cloudy but, for all this strong talk, many therapies still have annual five or six figure price tags and are extremely profitable. People keep getting sick and keep spending whatever it takes to get better. That is why the long-term charts for big pharma and biotech companies like Eli Lilly (LLY) and Amgen (AMGN), insurers like United Healthcare (UNH), and vertically integrated companies in the space like CVS Caremark (CVS), are hardly indicative of companies with structural, long-term problems.
The thing is, no matter how much politicians talk, a multi-payer private sector approach to healthcare in the huge U.S. market massively benefits some companies in the system. You may or may not think that is a problem, but either way, you can benefit from it by targeting those companies when it comes to stock purchases.
My preference in that group is for biotech. We are in the midst of a revolution in healthcare as large molecule therapies, the ones whose non-commercial names end in “MAB”, which stands for “monoclonal anti body,” become more sophisticated and more prevalent. They offer remarkable benefits, like living longer with certain cancers and the slowing of progress of some debilitating diseases, but they are expensive. Cynics would say that they are expensive because they can be, because people will pay whatever it takes to get them, while the more charitable would say that they have to be to reflect the R&D costs inherent in such revolutionary drugs. Whatever the reason, though, expensive therapies result in big profits for the companies that make them.
It is true, however, that R&D and launch costs for biologics are huge, so there are both winners and losers among biotech therapies. As a result, this is a case where diversification is key. For investors the easiest way to achieve that is to buy an industry ETF rather than try to guess which individual company or therapy will be successful, and the biggest and best-known ETF in the sector is the iShares Nasdaq Biotech Index Fund (IBB).
As you can see, IBB has not avoided the bear market in growth stocks generally, but nor has it returned to its June lows in the most recent selloff. That recent support reflects the widely held view that while there is still some short-term turbulence to get through, the longer-term outlook for the economy and the market, and therefore for some growth stocks, is okay. If you believe that to be true and are looking for something to buy to reflect it, then IBB, at a 28% discount to its 52-week high and with substantial growth expected in the industry as new therapies emerge, is something you should consider.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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