Healthcare is one of the most politically sensitive sectors and that sensitivity is on full display in recent weeks with biotechnology ETFs, including the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT).
Recent weakness among FBT and other biotech ETFs isn’t necessarily surprising with Election Day looming. In fact, history confirms biotech stocks slid within two months of Election Day during the last four presidential election cycles.
“However, since peaking on July 20th, the NYSE Arca Biotechnology Index has declined by 12.7%, while the S&P 500 Index has advanced by 8.7% (through 9/1/20),” said First Trust Senior Vice President Ryan Issakanien in a recent note.
FBT is also worth considering if the U.S. economy takes a while to rebound from the pandemic. SVB Leerink analyst Geoffrey Porges recently pointed out in a note to clients that biotechnology and pharmaceutical benchmarks topped the broader market during the 2001 recession, the global financial crisis, and during the current economic malaise.
Politics at Play
History suggests investors may want to consider buying FBT’s recent dip.
“While there are many possible explanations for biotech’s recent underperformance, I believe one important factor is the upcoming presidential election. Rising health care costs in the U.S. have been a go-to wedge issue for Democratic party candidates in election campaigns, especially over the past two decades (the Affordable Care Act passed in 2010). But if history repeats, this pullback may represent an attractive buying opportunity.”
Of course, there’s plenty of election year conjecture to deal with, but biotech stocks usually emerge from presidential politics in strong for, with historical data confirming as much.
“During the last four presidential elections (2004, 2008, 2012 and 2016), biotechnology stocks performed poorly heading into election day. On average, the NYSE Arca Biotechnology Index had a -6.4% return during the prior 2 months,” according to First Trust. “However, biotech stocks also rebounded nicely following these elections, regardless of which candidate was elected. While Democratic and Republican presidential candidates split these four elections evenly, the average return 2 months after election day was 4.9%, and the average return 12 months after election day was 34.6%.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.