The biotech sector is exhibiting remarkable strength and resilience during these turbulent market conditions. Interestingly, biotechs were actually a laggard during the last leg of the bull market from early-2016 to late-2018. The iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) was up 50% which lagged the Nasdaq 100's (Nasdaq: QQQ) 100% gain and the S&P 500's (NYSE: SPY) 70% gain.
One major contributor to this underperformance was the biotech group's massive gains between 2009 and 2015 when it was the strongest sector in the market and by some measures hit speculative extremes in terms of valuation and sentiment. Thus, it's not surprising that the group needed to consolidate to work off these extremes.
Short-Term Technicals
This price action is a contrast to other parts of the market which were under distribution since late-2018 or were hitting extremes in late-2020 that have led to hemorrhaging losses as the broad market fell apart in recent weeks. Biotech stocks are showing impressive relative strength during this period - accumulation during bearish market conditions should always be noted.
For example, as of Friday's open, the S&P 500 was 13% below its October lows. In contrast, the biotechnology ETF is 3% higher from these levels. Additionally, IBB is 25% off its all-time high set and 19% off its late-2020 high, while the S&P 500 is 27% off these levels.
Improving Fundamentals
IBB's strength is somewhat surprising especially in this risk-off environment as high-beta stocks will typically see steeper corrections. However, the genesis for these bearish market conditions has been the coronavirus, and it will certainly lead to more investments in drug development and biotech companies from public and private partners.
Additionally, odds of a Democratic takeover of Congress and the executive branch continue to rise which favors increased investment in the healthcare sector. This experience has also highlighted the faults in the country's healthcare infrastructure which also favors the idea that a massive dose of "healthcare stimulus" will be coming.
IBB's five-year trading range has also played its role in shaking out weak hands and transferring shares to longer, patient holders. Companies in the sector have continued to grow earnings, while share prices flat-lined, bringing their valuations down. Currently, IBB's price to earnings ratio is 18, which is a significant contraction from 55 at its peak in July 2015. Since prices have largely been flat, this is due to earnings growth. And recent developments indicate that this earnings growth isn't going to end anytime soon.