The biotech bear market from February 2021 through October 2023 created some dramatically underpriced stocks. There is free money lying on the sidewalk, just waiting for you to pick it up.
Dear Biotechies:
Stocks hit new highs as Chairman Powell told Congress the central bank is in no hurry to ease policy, though he said rate cuts are likely to come this year. I'm still doubtful, although I think a mild recession will start this year. It takes the National Bureau of Economic Research about a year after a recession starts to call it. That delay will give the Fed enough cover to not cut unless the recession spirals into something much bigger than I'm expecting.
The labor markets are slowly weakening. Friday morning's (fake) payrolls number will be revised down sharply, as usual. January's Job Openings and Labor Turnover Survey (JOLTS) showed 5.7 million hires were made in the month, a slight decrease from the 5.8 million in December. There were 8.86 million jobs open at the end of January, another slight decrease from the 8.89 million job openings in December, and the lowest level since March 2021. The quits rate, a sign of confidence among workers, slipped slightly to 2.1%, down from 2.2% in December and the lowest level since August 2020.
h/t Yahoo Finance
The ISM reports agree that employment has weakened notably in the last five months. The chart below shows the average of the employment sub-component for the ISM Manufacturing and ISM Services Index. The chart is smoothed by four months to reduce the choppiness.
h/t @EPBResearch
What will the Fed do? Torsten Sløk, Apollo Global's chief economist, became one of first Wall Streeter's to join me in saying “rates are going to stay higher for longer.” He even predicts the Fed will not cut rates this year. I think it's too early to make that call, as I still believe a recession is imminent and the Fed probably will make tiny cuts in response.
If you want to know what the Fed will do next, you could try to guess what their 400 PhDs will advise them to do based on their complex economic models. Or you could just do what I do and follow the 2-year Treasury note.
h/t @McClellanOsc
Market Outlook
The S&P 500 added 1.2% since last Thursday to new all-time highs yesterday as breadth improved and the percentage of stocks in the Index setting new 52-week highs surpassed the December peak. The S&P is up 8.1% year-to-date.
Since 1957, the S&P 500 has returned more than 20% over a four-month time frame only 14 other times, with the last coming in the summer of 2020. Twelve of those other 14 occurrences saw <double-digit returns over the next 12 months, with the lowest return being a positive 1.16%.
In years after the S&P gained in both January and February, the final 10 months of the year were higher 26 out of 28 times. The next 12 months were higher an amazing 27 out of 28 times, with the returns in both cases much better than the average returns.
h/t Carson Group
Looking at historical bull market analogs, we can see that after a slow start in 2023, the S&P 500 has now entered the zone of a typical bull market.
h/t @TimmerFidelity
The Nasdaq Composite gained 1.1%, setting a new intraday high today. It is up 8.4% for the year. The SPDR S&P Biotech Exchange-Traded Fund (XBI) only added 0.4% as the biotech rally took a breather. It is up 10.6% year-to-date. The small-cap Russell 2000 booked a 1.5% gain and is up 2.8% in 2024.
The fractal dimension is ridiculously overextended, but I said that last week.
I'm going to have to expand the graphic to properly record both the S&P highs and the fractal lows.
Economy
The Atlanta Fed's GDPNow model forecast for March quarter real GDP growth is down to +2.5%, a level the Blue Chip economists are rapidly approaching.
Biotech Focus
Biotech Investor, a former biotech executive and investment banker, pointed out that when thinking about investing in a biotech company, investors should think about not only the TOTAL revenue opportunity of the therapeutic area (TA), but also how QUICKLY that TA is expected to grow. Obesity and oncology are growing fast.
I would add you need to think about the COMPETITORS in each therapeutic area. Obesity is projected to grow fastest, but there are many Big Pharma competitors that can pour money into drug discovery and rapid development. Oncology is the second-fastest grower, but not only is Big Pharma targeting onc, there are hundreds of small biotechs targeting virtually every sector of oncology, including rare diseases. We own one of them, but only because it is run by one of the best drug developers in the world.
On the other hand, look at Mental Health. It's projected to grow third-fastest at a 9% to 12% compound annual growth rate for the next five years. There are relatively fewer competitors, mostly small, and we own the clear leader already doing two Phase 3 trials for approval. I'm a lot more confident that they're a home run than I am about the small oncology recommendation, even though I think both will get to market.
h/t @learnbiotech
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Biotech Moonshots Portfolio Update
After last week's 19.6% gain, the portfolio gave back 5.7% this week as the biotech sector faltered. I really can't complain about the two-week performance. There's enough clinical and other data coming to drive our performance much higher in 2024 and it’s not too late to get onboard! You don’t have to chase hot stocks and risk a sudden drawdown. There are plenty of opportunities, like the Mental Health stock I mentioned (symbol after the paywall) that are undervalued. You can continue to buy even as you minimize risk.
If you know how to do this, excellent – most investors do not. And if you’d like some help along with the education needed to become a more knowledgeable, effective, and consistent investor, you may enjoy a paid membership. Let's dig in...
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