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Market At 2023 Highs - Can Small Caps Continue to Rally?

• A Big Week for the Fed and economic data with many stocks at 2023 highs.
• For the Bull Run to continue we need broader market participation from SMID caps.
• Large Cap Biopharma stocks remain stalled from Medicare drug pricing legislation and the M&A blocking actions from the FTC.

It’s going to be a pivotal week for the market as MACRO events once again intervene. The Fed meets on Wednesday and many economists expect a pause in the rate increases, taking time to examine more future data. Inflation data is coming on Tuesday with consumer prices expected to rise 0.30% on a monthly basis. And the technicals become more important as the S&P has shown gains of 20% off October lows with recession fears abating. Of course, many other markets are bullish in 2023 with the NASDAQ-100 up 33%, the S&P 500 up 12% yet the DOW up only 2.2%.

For the market to continue gains in 2023 we will need broader participation from cyclical and SMID stocks. Most of the gains in 2023 have been concentrated in large cap IT and Consumer Discretionary stocks: AAPL, AMD, AMZN, GOOGL, META, MSFT, NVDA. AI continues the driving theme for MOmentum in these and other NASDAQ-100 stocks.

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Many of our large cap biopharma holdings are off their 2023 highs. Here are the leading Large Caps % performance YTD:  BIIB, AZN, VRTX, LLY, MRK. Astra Zeneca (AZN) was up 2.03% for the week and 9.23% YTD. Recent data showed encouraging results from their non-small cell lung cancer drug in a Phase 1b trial. Also after the close on Friday tne FDA approved their Lynparza drug for !L prostate. The pipeline looks promising and the FWD PE is 17.34, with a P/S of 5.7.

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Over the past month, SMID caps have gained ground with many small cap value funds up more than 5%. Many strategists believe this sector of the market should take off at the beginning of a new bull market. Of course, biotech is a different animal and less correlated to the economy but as a bear market ends and I rates stop increasing it becomes easier to raise money. Our Life Science Portfolio below shows the gains achieved in 2023. Many of the winners YTD were well-known growth stocks in 2021 then took a big hit in the 2022 downturn. The biggest winners are: PACB, GERN, CRSP but others have done well but are more volatile. value stocks like HOLX and QDEL are off their recent highs but should do well because of strong balance sheets and management teams. Our top fund pick is the T.Rowe Price Health Sciences Fund (PRHSX).

Biotech stocks lag the market in 2022/23 for several reasons for example, too many smaller companies, less M&A, patent expirations and competition from biosimilars. Moreover, the large cap biopharmas have been under a cloud lately because of drug pricing legislation (Inflation Reduction Act). Healthcare stocks are also lagging with the XLV down 4% YTD and United Health (UNH) down 6.9% YTD. Although there was excellent clinical data from the ASCO Meeting it did not move the sector up significantly but the XBI held onto gains YTD.

We hope to add new picks to our portfolio but if you are wary of the toppy charts ahead of the Fed so this might be a good time to raise a little cash.

We are long all of these stocks but trade the XBI.

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A Good Week For The Market But A Pause In The Biotech Rally