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When The Market Goes Bust

Posted March 22, 2023

Ray Blanco

By Ray Blanco

When The Market Goes Bust

Right now, confidence in the market is shaky at best… 

Sure, we get a few positive headlines every now and again whether they’re about inflation cooling or a slowing rate hike cycle.

But still, there are a handful of factors weighing on investors' minds that present a major roadblock for the market to move higher with a meaningful, sustained rally. 

Most recently, we got a big banking explosion courtesy of Silicon Valley Bank that translated to tanking bank stocks. 

And with little to no consequences, it’s not like this sort of behavior has been deterred in any meaningful way… 

Elsewhere, you have still-tough economic conditions plaguing businesses in the US. 

We’ve seen this play out in the way of mass layoffs in some of the investor-favorite tech darlings of 2020 and 2021. 

Companies like Twitter, Amazon, Meta, and more were laying off employees by the tens of thousands after expanding too quickly when money was free, then got caught off guard when economic conditions became less favorable. 

And who could forget about the state of politics right now… 

Political theater is at an all-time high right now with officials treating the government like it's a reality TV show. 

And of course, there is also a myriad of rising geopolitical tensions and a full-blown war going on between Russia and Ukraine. 

Surely, the market environment right now is a tough one to call. 

Even still, the market has done a decent job of not completely breaking down in the face of all this adversity. 

While it hasn’t exactly been going straight up, it hasn’t gone straight down either despite all of the factors I mentioned above. 

Is the other shoe waiting to drop and this is just the calm before the storm? Or, is the worst truly over? 

Calling a market top or bottom is a fool’s game but, luckily, you don’t have to if you want to stay profitable in any market environment. 

Not All Stocks Are the Same

That’s right, I’ll say it again: not all individual stocks are the same… 

Some stocks, driven by catalysts, can rise in a falling market, sometimes very quickly. 

That’s one reason to love biotech stocks. 

A biotech that can successfully survive the rigors of an important experimental drug in a clinical trial, or earn a major FDA approval, bringing a potential blockbuster to market, can fly even when markets are tanking. 

These stocks can defy general market conditions on this kind of news, shooting up to double or triple-digit gains in a day. 

But biotech catalyst stocks aren’t the only way to grab gains in a down market. There are less risky ways to protect yourself. 

Some stocks can act as a defense against losses during a recession. These defensive names boast the ability to maintain earnings and dividends even during an economic downturn. 

That’s because the companies behind these stocks can continue to sell products and generate revenues even when the economy slows down. 

When times are tough, people will cut back on things like luxury items and vacations, but they still need things like electricity, basic staples, and health care. 

That’s why you can find pockets of green in almost any market environment, even when it seems like everything is going straight down. 

I know, it's probably hard to believe, but how on Earth can some of the market's riskiest stocks soar in an already risky market?

Well, there are a handful of answers that are simpler than you think… 

As I mentioned above, FDA approvals can act as jet fuel for biotech stocks when they finally come through.

On top of that, biotech stocks fell to bargain bin prices last year and large drugmakers started buying them up at steep discounts to fuel their patent pipelines.

Consulting firm ZS Associates notes the top-ten drugmakers have more than 46 percent of their revenues at risk between 2022 and 2030.

And if there’s one thing true of the biotech market, new and effective drugs are the lifeblood of the entire system.

The prospect of expiring patents on marquee products is devastating for a drug company.

So Big Pharma spent big to set itself up for success over the next decade.

The feeding frenzy for takeover targets sent the value of the entire sector soaring.

Last year, $126 billion in biotech takeovers were announced. Not the biggest year for biotech acquisitions… But the deal sizes are still enormous.

Merck acquired Seagen Inc. for a whopping $34.9 billion.

Its rival Pfizer took out Biohaven Pharmaceuticals for $11.6 billion in May.

Just three months later, it bought Global Blood Therapeutics for $4.6 billion.

And Bristol-Myers Squibb Co. scooped up Turning Point Therapeutics for just under $3 billion.

All told, most of these companies are being acquired at a premium of 40-50% to their pre-deal price, according to data from Bloomberg.

(Imagine that YOU were holding one of these stocks and saw that kind of a one-day gain -- or even higher.)

Then, there's another big reason drugmakers are opening their wallets for biotech names...

2022 has seen 31 novel FDA drug approvals so far, the fewest since 2016 which, incidentally, was another year where biotech reached a bottom and started to recover.

As we settle into this year, I expect to see the tempo of approvals return to normal with potential blockbusters hitting the FDA's desk as the year rolls on.

With Covid-19’s effects on drug development receding in the rearview mirror, I’m convinced that new drug launches will support a sustainably rising biotech market.

Even on a technical level, biotech stocks look ready for a run… 

Right now, the SPDR S&P Biotech ETF (XBI) is resting right on a 6-month support level that it was back toward the end of September 2022. 

From there, XBI went on a rally of over 20%. 

After that, the ETF couldn’t hold onto gains and fell back down to support, if we get a bounce from here we could see another sizable rally!

So not only can biotech stocks act as a reprieve from a painful market... The sector is looking ripe for a rally with the potential to outperform the broad market in 2023.

Now, before I go, I’d love to hear back from you about today’s topic. Do you invest in biotech companies? If so, are there any you want me to dive deeper on? If not, what keeps you from jumping in? Drop me a line and let me know here:

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