Healthcare Stocks Tumble as Clinton’s Lead Widens; Are the Jitters Justified or Do Opportunities Abound?

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Democratic presidential nominee Hillary Clinton has been named the culprit for beating down biotech stocks just for squealing about high drug prices on Twitter. Imagine the ever-increasing likelihood of her becoming the first female commander-in-chief.

Indeed, healthcare stocks are the only group in the S&P 500 Index posting losses in 2016 through last Friday, and are on pace for the first yearly decline since the bull market began in 2009, Bloomberg points out. Among the 10 biggest single-stock declines in the benchmark gauge this year, six are healthcare companies, which include drug, insurance and hospital stocks.

Pharma companies, in particular, have become political targets during the election season Click To Tweet

The weakness is a departure from the past five years, when health care’s 128% advance through 2015 ranked ahead of any other group. Now they’re down 4% in 2016 as investors evaluate how the industry will perform should Ms. Clinton be elected president. The group posted a 3.3% decline last week, the biggest five-day loss since February.

“You have a perfect storm–you obviously have the headline risk associated with the election,” Craig Sterling, head of US equity research at Boston-based Pioneer Investment Management, said, according to Bloomberg. “There’s a much brighter light on the whole system. Whether this is temporal or not, it’s hard to know. If Hillary Clinton gets elected, it seems to be like there will be continued interest in it.”

Pharma companies, in particular, have become political targets during the election season. Valeant Pharmaceuticals International Inc., Mylan NV, Turing Pharmaceuticals LLC and others have been the focal point of congressional hearings, and Democratic presidential nominee Clinton has called out specific companies for price increases on old drugs. Last week, a tweet by Senator Bernie Sanders, where he cited Ariad Pharmaceuticals Inc. “greed” for raising the price of a cancer drug, sent the company’s shares down as much as 15%.

Alarm is growing as Clinton’s polling lead over Donald Trump widens and amid the possibility of Democrat control in Congress. At the same time, there’s been an overall shift in 2016 away from bull-market favorites like biotechnology and consumer-discretionary shares and into stocks with tougher defensive records.

“There’s biotech, there’s managed-care and there’s hospitals, and they all have their different issues right now,” Dan Clifton, head of policy research at Strategas Research Partners in Washington, D.C., said. “Pharma and biotech probably have more at stake in this election than any industry.”

US stocks fluctuated Monday, said Bloomberg, as investors evaluated corporate earnings and remarks from Federal Reserve Vice Chairman Stanley Fischer, who said government policies could partly counteract the impact of lower productivity and an aging population that are holding back the US economy and weighing on interest rates.

“My theme for the next couple of weeks is focus on earnings, but keep one eye on the dollar and interest rates,” said Mark Kepner, managing director and equity trader at Themis Trading LLC in Chatham, New Jersey. “The dollar keeps strengthening and that could have some effect on earnings.”

The S&P 500 is on track for an October drop, a month that has yielded gains in five of the past six years. The benchmark is down 1.8% for the period so far after capping the first back-to-back weekly declines since August. It closed Friday 2.6% below a record last reached two months ago.

Steve’s Take: Seems as though, as investors, we’ve been down this road of nail-biting and high anxiety many times–right before each recent presidential election. And we know that markets detest uncertainty, which ordinarily results in a flight to safety, viz., Treasuries, etc. So do we hold, or do we fold?

Something feels different this time. It’s as though a shroud of free-floating anxiety has descended on Wall Street without the calm, rational analysis of the potential realities of what a Clinton victory, even a landslide, actually portends for healthcare stocks.

With Hillary Clinton firming up a huge lead over Donald Trump just three weeks and a day from Election Day, rising uncertainty over policy is replacing declining uncertainty about the outcome, according to analysts at Goldman Sachs. And Nate Silver’s website, FiveThirtyEight, thinks there’s an 86% chance that Hillary Clinton will become the next president. It’s time to start pondering what that could mean for investors. Does anyone recall that kind of certainty about an election outcome in their lifetime? I can’t.

So healthcare investors, especially those that are overweighted in pharmaceutical and biotech stocks, are right-minded in paying close attention to what Clinton says; there’s a general feeling that Hillary could be bad for their prospects. Clinton has made no secret she wants to curb excessive profits some companies make by dramatically increasing prices to life-saving drugs that have been available in some cases for decades.

“There is no doubt in my mind that the biotech sector will be one of the perceived biggest losers with a Clinton presidency,” says Matthew Carbray, certified financial planner and managing partner at Ridgeline Financial Partners.

On Sep. 21, 2015, Clinton tweeted that “price gouging like this in the specialty drug market is outrageous,” in reference to Turing Pharmaceuticals, which had recently raised the price of a newly acquired drug–used out of necessity by many HIV/AIDS patients–from $13.50 to $750 per pill. Naturally, Turing’s CEO, Martin Shkreli, vigorously defended the move. It wasn’t persuasive, and he’s spending his days appearing in US Federal Court in Brooklyn.

However, on Wall Street in the short term, perception is reality. And the perception that Clinton will be bad news for Pharma and biotech does have some justification behind it. After all, the POTUS can exert colossal influence over the destiny of industries.

But even assuming a Clinton victory, her new policies would take months if not years to enact and their implications could take even longer to be felt in the economy and stock market.

What’s more, “Congress ultimately determines what gets done, while the President only gets to express what he/she would like to see done,” says Robert Isbitts, founder and chief investment strategist at Sungarden Investment Research in Weston, Fl. “And with Congress sporting a puny approval rating, unless there is one party with a majority in both houses and the White House, the challenge of moving policy forward will be as difficult as ever.”

I agree with those who are skeptical that Ms. Clinton will enact sweeping changes that will lead to less investment in health care and result in lower research spending and less innovation.

Jordan Kimmel, co-founder and portfolio manager of FACTS Asset Management, says, “I think Hillary is simply jumping on a very populist bandwagon right now.” Pharma and biotech will face increased exposure and public pressure in the short-term, “but I think a lot of it goes away after the election,” Kimmel says, largely because of industry lobbyists. “K Street is way more powerful than it should be.”

Jonathan Gertler, CEO and managing partner of Back Bay Life Science Advisors, agrees with Kimmel that a Clinton administration would not needlessly regulate the pharma and biotech industries or damage either’s overall “investability.” But it’s not the sway of K Street that has him convinced. Dramatic overregulation, simply put, would be positively absurd.

“Those novel drugs that really have an impact on society have expenses associated with them, and I think any oversight agency will recognize the need to support return on investment for that type of contribution,” he says, seemingly stating the obvious.

Gertler feels that Clinton’s support for science and education shows her policies will be a boon to the healthcare sector.

“Hillary has long been an advocate of data-driven approaches to how science fits in our society,” he says. “That’s going to be beneficial for our country and our industry.”

The public and private sectors have increasingly teamed up to work on unmet needs in health care, a trend Gertler sees continuing under Clinton.

Excepting a dramatic shift in momentum to Mr. Trump, the question for investors might be just how far down the Democratic ballot Ms. Clinton’s presumed landslide will change the status quo, if at all. Prediction markets as of Friday saw an 85% chance Clinton would win the presidency and a 70% likelihood Democrats would take back control of the Senate.

But winning back the House, where Democrats would need to gain 32 seats, remains only a slight possibility, with a probability of 35%, said Goldman analysts led by David Kostin (pdf). Clients are now focused on the possibility that the contest turns into a “wave election” in favor of the Democrats, they said.

Political scientists generally define a wave election as an outcome in which one party makes sweeping gains that give them the power to shift the status quo. The 2008 presidential election, which saw Barack Obama win the presidency while Democrats took control of both the House and Senate was a recent example.

Steve's Take: Anxiety over #healthcare stocks seems unwarranted, time to seek out bargains Click To Tweet

But even with a wave election for Democrats on Nov. 8, the nail biting and free-floating anxiety over healthcare stocks still seems to be unwarranted. In fact, now might be the perfect time to seek out bargains in this beaten-down industry.