Biotech stocks got a big boost in the aftermath of the U.S. presidential election. But it didn’t last long – as the sector succumbed to the sell-off that plagued the overall market last week.
Is this just a normal sell-off? Or is there something else happening under the hood? Well, let me explain…
Last Thursday, president-elect Donald Trump announced he will nominate Robert Kennedy Jr. as the new head of the Department of Health and Human Services (HHS). The biotech sector took a big hit as a result – with the SPDR S&P Biotech ETF (XBI) falling 12% to its lowest level in three months.
The nomination sparked concerns that Kennedy will go after drug companies which weighed on the sector. What’s more, the steady rise in interest rates has been another negative for biotech stocks. The yield on the 10-year U.S. Treasury reached 4.5% on Friday – the highest we’ve seen since late May and up 3.6% in mid-September.
A large portion of biotech companies must borrow money to pay for the research and development of new treatments. A new drug typically takes about 10 years to develop – and approximately $1 billion to just potentially gain approval from the U.S. Food and Drug Administration.
Developing drugs is a costly business. And when interest rates are higher, the cost of borrowing money becomes even more expensive.
Now, I think both of these negative factors may be way overblown – especially considering the fact that this sector was trading at its best level since last 2021 just last week.
Plus, there are several positive catalysts working in biotechs’ favor right now…
The breakthroughs that have occurred in the biotech sector over the last two decades have been life-altering for many. In the next decade, I expect we’ll see even more breakthroughs that will change humanity.
Interest rates aren’t that high considering where they’ve been since the turn of the century. Sure, borrowing costs are higher than they were a couple years ago. But they’re not at levels that will completely deter investment.
The Trump administration will go after some drug companies, but I expect larger pharmaceuticals will see more risk than biotechs.
Speaking of large pharmaceuticals, the Trump administration will likely allow more mergers to make it through the approval process. That would be a huge potential bonus for biotech stocks.
Finally, biotech stocks tend to move in a cyclical pattern – with a few years of outperformance followed by a couple years where they lag the overall market. The sector is currently due to outperform.
I like the biotech space right now – and I’d look to be overweight in it heading into 2025. The recent pullback could offer a great window of opportunity.
Here’s to the future,
Matt McCallEditor, Market Insights
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