Healthcare And Biotechs Feel The Heat As The Market At New Highs

Biotechnology Stocks - Prudent Biotech

  • Market indexes have arrived at their best point since the 52-week highs set in October last year.
  • Enough support for the market, including nervous money on the sidelines, to climb higher and record new highs.
  • Biotech indexes and the healthcare sector are making progress but have been feeling political heat which has created intense volatility.
  • Promising science and industry changes are driving biotech M&A and partnerships, even though systemic political concerns exist.
  • Biotechs remain a promising part of the healthcare sector which has an uphill climb this year. ~ Healthcare stocks, Biotech Stocks

The stock market has continued to edge higher and the two major indexes, the Nasdaq (QQQ) and S&P 500 (SPY), touched the all-time high milestone last week.

The steady gain reflects a diminishing concern relating to the pace of a global economic slowdown, as major central banks and governments have moved to bolster growth. The Federal Reserve has been relatively aggressive in adjusting its policy this year after recognizing the potential risks to economic growth. At the same time, the Chinese economy is beginning to reveal signs of bottoming out as the government begins to boost infrastructural and stimulus spending. The ECB has been equally sensitive about signs of an economic slowdown and has indicated a patient approach. This almost concerted effort in key economic blocs is assuaging concerns that the global economy is sliding into an inevitable slowdown and recession.

The US yield curve inversion of the 3 month/10 year spread had spooked the financial markets last month. The inversion is mostly good for stocks over the next many months, as it raises the possibility of a Fed easing. However, as was noted in the article, Zero Spread Is Not Stomping Out A Bull Market, the more robust 2-year / 10-year spread did not turn zero, which would have confirmed a yield inversion and a recession in the future. ~ 2 year and 10 year spread

2 Year and 10 Year Spread ~ Did Not Touch Zero Yet or Turn Negative ~ Source: FRED

The first quarter GDP growth of 3.2%, although boosted by some transitory factors, has undercut an argument for a 2019 or even an early 2020 recession. As of today, a recession is a low probability outcome. In our opinion, a more likely scenario will be a step-down in growth in the first 9-months, followed by an improvement, based on resolving trade disputes and global stimulative measures.

Earnings Showdown

The ongoing earnings season will determine the market's near-term direction. The expectation at the beginning of the month was for the first quarter earnings of the S&P 500 companies to decline by 4.3%, year-over-year, which would be the first decline since the second quarter of 2016.

Thus far, after replacing estimated earnings with actual earnings for the ~45% of S&P 500 companies that have reported, the earnings decline is 2.3%, as per Factset.

The ensuing week will provide a more concrete picture of the earnings decline as a majority of the reporting S&P 500 companies would have released their earnings by end of the week.

In all likelihood, the first quarter earnings will not be worst than the expectations of -4%. There is also the possibility that the S&P 500 earnings decline is much less than the expected -4%. In such a case, it would strengthen the bullish scenario and provide the market with a good chance to hold its ground and move consistently to new highs.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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